Apple May Have Unprecedented Pricing Power For The iPhone 8

by Trefis Team
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Apple (NASDAQ:AAPL) is prepping to launch its 10th anniversary iPhone (potentially called iPhone 8) this fall. The device, which is expected to sport the company’s first complete redesign since 2014, is likely to set off a super-upgrade cycle. There has been speculation that the phone could be priced starting at $1,000 – well above the current iPhone 7 line up, which starts at $650. While we will likely have to wait until September for more details, it’s fair to assume that Apple will have unprecedented pricing power for the new device for a few reasons, which we discuss below.

We have a $139 price estimate for Apple, which is about 10% below the current market price.

See Our Complete Analysis For Apple Here

Demand For Fresh Looking Apple Device

The visual appearance of the iPhone remains key to Apple’s customer base, particularly in emerging markets, as the device is viewed as a status symbol of sorts. The new iPhone is rumored to sport Apple’s first smartphone design refresh in close to three years and likely features include a distinctive edge-to-edge display, which could entice users of older devices such as the iPhone 6 to upgrade. Supply of the new device is also expected to be significantly constrained at the time of launch, amid potential component shortages (OLED screens) and also as Apple irons out potential manufacturing yield issues relating to the new industrial design. The scarcity factor may also help Apple initially justify the high price.

Apple Users Have Been Paying More For Phones

iPhone users are generally not very price-sensitive, and they have been spending on more expensive versions of the device with bigger displays and more memory. For instance, IDC estimates that roughly half of iPhone customers now choose iPhone 7 Plus models compared to under a third of customers who chose the Plus model during the iPhone 6 cycle. This clearly reflects on Apple’s ASPs, which have risen from roughly $600 in 2013 to about $650 in 2016. Apple could also use its tried-and-tested storage mix strategy to justify higher entry level pricing. For instance, if the new model launches with base storage of 128 GB (instead of its standard 32 GB entry point) at a price of $1,000, it would cost only ~15% more than the 128 GB iPhone 7 Plus.

Carrier Financing Helps Reduce Upfront Costs

U.S. carriers have largely abandoned the device subsidy model, under which customers paid a higher monthly service fee in return for subsidized hardware. These days, all the major carriers typically offer financing schemes such as equipment installment plans and leases that effectively allow consumers to buy the latest handsets with no down payment, with the entire cost of the device paid over a period of one or two years. For instance, under the typical subsidy scheme a $650 iPhone was priced at $200 upfront, and under that same structure a $1,000 device would potentially have been priced at $550 – which would have been an obstacle for many customers. However, the equipment financing model could help Apple partly mask the higher pricing of the new device.

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