If you’ve ever shopped for a smartphone before, you’ve probably seen sales. Android smartphones go on sale fairly regularly, so it’s pretty easy to purchase one for less than retail price. But when it comes to the iPhone, that’s nearly impossible. Apple never offers sales on their smartphones, even though they’re some of the priciest in the industry. Instead, Apple encourages customers to trade in their old iPhone for a discount, or sign up for the iPhone Installments program to make the full payment over a longer period. So why is Apple so averse to running iPhone sales?
They’re already making so much money, and they could sell a lot more units if they lowered the price, right? All right so why doesn’t Apple just lower the iPhone’s price a little bit to get more customers? Well, to figure out why we have to understand their business model. Which relies heavily on hardware sales. Consider Google, they make 74% of their revenue from ads. Which involves capturing user data and selling it to advertisers. To have user data to sell, they need users. That’s why so many of their software products are free.
The money they’d make from selling their software to customers pales in comparison to what they make off user data. Hardware sales make up such a tiny percentage of Google’s earnings that they included it in their miscellaneous category that not only includes their Pixel smartphone and Nest home products, but also digital sales from their google play store. And all of those things combine, only amount to 12% of total revenue.
Compare that to Apple, which makes 78% of its revenue from hardware. And although having more customers would be beneficial to their services business, since that means more potential iCloud, Apple Arcade, and Apple News Plus subscribers, Apple’s primary focus has always been and continues to be on profit from hardware. And profit is the keyword, not revenue.
Selling an iPhone 12 for $500 would give Apple $500 in revenue, but they wouldn’t make any profit since it costs about $500 to make the product. That’s why the emphasis on profit margin is so important. And it’s also why Apple will never sell a television set since the margins in that industry are razor-thin. Margins in the tech market are known to be slim compared to other businesses like clothing. Where manufactures markup their product by 100 to 250% or more.
That’s why stores like H&M can run sales all year round and still make huge profits. But technology is not only more competitive, but it’s also more costly. Bringing something like a smartphone to market not only requires investment in research and development for the hardware, but also in software development for the operating system. And the problem is these costs are so high, that tech companies can’t charge 250% markups since it would make their product prohibitively expensive. So they typically use other business models to make money.
Like the example with Google I mentioned earlier, or even a company like Amazon. Who sells their Kindle Fire tablet at a loss, since their business model isn’t based on hardware sales, but rather media sales like ebooks, which 80% of Kindle users have purchased. But Apple made the decision a long time ago to avoid this business model. Since it results in a race to the bottom that doesn’t benefit the company or the user. Amazon isn’t trying to make the best tablet possible, they’re simply trying to make it as cheap as possible. So they can get their high-margin ebooks into as many hands as possible.
And while there’ll always be a market for cheap electronics, that’s not the demographic Apple targets.
Instead, they go in the opposite direction. Hoping, that by offering a superior user experience, customers will pay a premium for their product. It worked with the Mac, which only made up about 7% of all computers sold in 2019. But accounted for almost 14% of the entire market’s revenue. That’s because Apple’s profit margin is much wider than the competition. Companies like Dell try to price low and sell a high volume of computers. While Apple is happy to sell a lot less, as long as their margins remain high. And that philosophy applies to every product they make.
That’s why, when the iPhone debuted in 2007, it was the most expensive phone on the market. With many believing the price was out of reach for the average smartphone customer. But Apple didn’t mind if only a fraction of customers bought their product. When Steve Jobs introduced iPhone, he clearly outlined Apple’s sales goal. Hoping to capture 1% of the mobile phone market in 2008. That was a tiny number, something they’d already exceeded with the Mac. But because the phone market was so big, a 1% share amounted to about 10 million units sold, and about five billion in revenue for Apple. But what happened was far better.
The iPhone didn’t experience the same market share ceiling as the Mac, which Apple may be expected to be the case. Over the years, the iPhone went on to dominate the US smartphone market with a 60% share. Dwarfing second-place Samsung with 24%. And that success resulted in an unprecedented amount of revenue for Apple. But all that success came with a problem. How would Apple ensure their revenue grows year over year?
With the Mac, they never even approached market saturation of their product, so their goal was always to attract as many PC switchers as possible and capture just a little more market share every year. But the iPhone had been far and away from the market leader in the US since its release. So the growth strategy of attracting new customers didn’t make sense, since Apple already had the majority. So to make more money, they were forced to raise prices.
That way, they wouldn’t have to sell more units to make more profit. And over the last five years, we’ve seen Apple push the limits of how much customers are willing to pay. The iPhone price hikes began in 2017 with the iPhone 8, 8 Plus, and X. For the first time, Apple was selling an iPhone for $1,000. If you wanted the larger capacity model, the price was $1,149. This raised the iPhone's average selling price from $606 in 2017 to $724 in 2018.
Boosting Apple’s annual revenue by 17%. But more importantly, was the 32% increase in profit. Had Apple not raised prices, they would’ve had to increase their customer base by at least 32% to achieve the same profit boost. But that big of a jump is not only virtually impossible but also completely irrelevant. Apple gained more customers when they raised the iPhone’s price to $1,000. So lowering it back down would be completely counterproductive.
Since there’s no way they’d suddenly achieve a 40 or 50% boost in sales that they’d need, just to match their profits from the previous year. And that’s exactly why Apple will never lower the iPhone’s price to try and sell more units. If they did, they would lose billions in profits overnight. And Tim Cook would probably be fired as CEO, all in an attempt to sell a few more units.
