Rafi Mohammed

Memo to Apple: The iPhone is a Hit...It's Time to RAISE Your Price!

Posted on June 15th, 2007 (1 Comments)

“How do you price hip?” It’s a good question, because “hip” is often an intangible attribute whose value is rarely recognized until a product launch. Back in the market research phase of price testing, consumers could evaluate the iPhone’s sleek style, touch screen features, and cool screen that projects both vertically and horizontally. But no interviewee could imagine, let alone value, the tremendous anticipation (created through masterful marketing) that has made the iPhone totally hip.

Like many others, I was taken aback when Apple announced its $499 (regular version: 4GB of storage) and $599 (deluxe 6 GB version) iPhone prices back in January. These prices represent a healthy premium over well-known smart phones like the sleek BlackBerry Palm Pearl ($149 with a 2 year contract with Cingular). Scoffing at the $500+ price tag, Microsoft’s CEO Steve Ballmer opined in a USA Today CEO forum “there's no chance that the iPhone is going to get any significant market share. No chance.” But Apple was smart; they told us the bad news (high prices) early, gave us 6 months to stew about them, and now many of us have accepted the prices.

Fast forward to today. Amol Sharma and Nick Wingfield report in today’s Wall Street Journal that 19 million people in the U.S., or roughly 9% of cell phone users, are “highly interested” in buying an iPhone. Another survey found that 12% of respondents had postponed purchasing a new cell phone to wait for the release of the iPhone. In great part due to the iPhone buzz, Lehman Brothers recently increased its price target for Apple’s stock by 20% to $146. The iPhone is smoking.

To date, Apple’s done a good job of pricing the iPhone. Few could have predicted today’s level of consumer interest – so it’d be disingenuous for me to opine they should have set higher prices. It was smart to set the regular version price below the $500 psychological threshold level. They probably could have charged more for the deluxe version and succeeded by offering an even higher priced premium model.

But here’s where Apple may falter. Analysts estimate Apple’s current gross margin for iPhones is roughly 50%. With such plush margins, analysts predict Apple will slash iPhone prices. Starting off high and dropping prices is a tried & true strategy for new technology. But Apple is in a unique situation. There is no meaningful competition (how many consumers are really going to buy the $810 LG Prada phone?) and the buzz is only likely to increase the iPhone’s value. The key to Apple’s future pricing strategy lies in exercising discount restraint (Motorola discovered that quickly discounting its RAZR phone from $500 to “free” with a two year contract to maintain market share isn’t a wildly profitable idea) and focusing on my favorite pricing strategy…versioning. So while the next generation of iPhones might offer some moderately discounted versions, my bet is the market will accept even higher priced iPhones with more stylistic features. The iPhone looks destined to be the next “must have” accessory for consumers and businesspeople.

If a notoriously “thrifty” shopper like me wants to purchase an iPhone at its release, you know it’s a value-packed product! A question for Mr. Ballmer, how do you like your crow cooked…boiled or steamed?

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Readers' Comments on This Blog Entry

From Jon Manning on September 6th, 2007
Hmmmm.....As the New York Times (and others) is reporting... Apple Cuts iPhone Price Ahead of Holidays SAN FRANCISCO, Sept. 5 — Apple unexpectedly cut the price of its iPhone Wednesday, claiming that it was seeking to broaden the market for the popular but expensive phone for the Christmas season.