Rafi Mohammed

Apple's iPhone Price Cut: The Discount Heard Around the World

Posted on September 9th, 2007 (3 Comments)

On Wednesday, Apple announced it was discounting its highest priced iPhone by $200 ($599 to $399) and discontinuing its lower priced iPhone ($499 retail price). The price cut was positioned as “broadening the market” for the iPhone in advance of the upcoming holiday season. The next day, to pacify angry customers who bought their iPhones at full price, Apple offered these early adopters a $100 Apple credit.

The facts about iPhone’s sales seem promising. Apple reported that it sold 270,000 iPhones in its first 30 hours of sales. Research firm iSuppli claims the iPhone was the top selling smart phone in July and estimates 4.5 million phones will be shipped in 2007. Apple reports that most iPhone purchases were for the higher priced $599 model (thus indicating that price was not a key obstacle). And finally, Apple CEO Steve Jobs asserted in a Wall Street Journal interview (9/6) that it could “absolutely” meet its goal of shipping one million iPhones by the end of the September without cutting prices.

So why cut the price? It seems odd that a price cut in hopes of spurring December holiday sales would be announced right after Labor Day. A few possibilities:

1. iPhone sales are disappointing and will not hit sales targets. While possible, in essence you’d be calling Steve Jobs a liar regarding his comments to the Wall Street Journal that sales would hit targets without a discount. Do you want to call Mr. Jobs a liar?

2. Apple wants to “blow out” its sales figures for the first full quarter of iPhone sales. Apple’s first full quarter of sales ends on September 30. An early September discount could be the catalyst to soundly beat sales expectations.

3. Apple is laying a foundation for an iPhone versioning strategy. Apple employs a classic good, better, best versioning strategy for most of its products. For example, versions of the iMac range from $1,199 to $2,299. Similarly, iPod prices range between $79 to $399. Let’s face it, Apple isn’t going to achieve its goal of selling 10 million iPhones by the end of 2008 by only offering $500+ price points. To hit such mass adoption, Apple’s going to have to offer an early bird, regular, and chef’s table pricing strategy.

Did you know that Apple has yet to offer the iPhone in Europe? The Financial Times Deutshland reports that Apple has recently signed exclusive contracts with T-Mobile of Germany, Orange of France, and O2 in the UK. Interestingly, these contracts reportedly require the wireless operators to pay Apple 10% of all call and data transfer revenue from iPhone customers. Rumors are that Apple will announce a premium 3G iPhone version at the Apple Expo in Paris on September 25. A new 3G iPhone may become the new chef’s table version in the U.S.

Only time will tell what to make of Apple’s surprise price cut. Apple’s first quarter sales figures along with its European launch will provide the full story.

Thanks to my good friend George for taking time out of his weekend to brainstorm on this blog.

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Readers' Comments on This Blog Entry

From Rafi on September 10th, 2007
Apple announced this morning that it had achieved its goal of selling one million iPhones, just 74 days after its release. They are definitely shooting for a big blow out! My bet is that the surprise discount was to produce great first quarter numbers and set the platform for future versioning. You heard it here first!
From Jon Manning on September 14th, 2007
Apple's price drop doesn't really come as a surprise to me. Consider... 1. The iPod entered virgin territory. The mobile phone market is extremely crowded 2. Currently, the iPhone is a 2G device. Most of the world now have 3G services available 3. People don't pay full price for handsets. The get subsidised or free handsets, and the telcos make their money on the service contracts. A better strategy for Apple may have been to set them selves up as a MVNO - mobile virtual network operator, allowing them to control the handset and the service market. Yes, it could be a start of a versioning strategy. But I don't know if they are doing this the right way either. Take the iPod - they've just got smaller and smaller, and with that, customers references prices have got lower and lower (the notable excpetion being the video iPod). Adding products to the top, rather than the bottom, of your product ladder is a better strategy. I don't know that we've seen the endgame in regards to the iPod yet, and the endgame for the iPhone is years away. Jon
From Jon Manning on September 20th, 2007
Rafi, Following on from this posting, you and your readers may want to check out the following HBR IdeaCast Podcast, titled "iPhone or iPhony". (I cant post weblinks in here, so just Google 'iPhone or iPhony'). A very interesting discussion to listen to on one's other Apple device...the iPod Jon