Will Apple Benefit From The iPhone Price Cut?

Posted by: Olga Kharif on September 7, 2007

Consultancy Compete came out with some really interesting data showing how demand for the iPhone is tied to price. The researcher’s June survey indicated that only 8% of U.S. consumers were willing to pay $599 or more for the iPhone. But 18% would cough up $400 or more.

So, let’s do some back-of-the-envelope calculations to determine the net effect on Apple. Say, the whole market is 100 people. If 8% of them buy the iPhone at $599, Apple pockets $4,792. If 18% buy the iPhone at $399, then Apple will generate $7,182 in revenues — that’s a 50% jump in dollar sales. So, basically, by slashing the price by 33%, the company will see its revenues rally 50%.

But what will happen to its profits? Let’s assume the device costs Apple $265 to make (you can see where I got that number here, in a story by my colleague Arik Hesseldahl). That means that if Apple sells 8 iPhones at the old price, it would end up with $2,680 in net profit. If it sells 18 iPhones at the new price, it only receives $2,412 in profits. It receives less.

I do realize that, by upping its unit volume, Apple will enjoy some economies of scale in costs. Yet, this math is troubling. There’s clearly some potential here for Apple to lose, financially.

Reader Comments

Nathan B

September 7, 2007 1:32 PM

Nice analysis - in my entire history of seeing Apple's products come and go, for this particular decade in history I'm not going to worry about Apple's sustainability in the marketplace. :)

$100/yr per Subscription

September 7, 2007 2:03 PM

Olga,

The Financial Times reports Apple will receive close to $100/yr/subscription: nearly pure profit.

Leaving the math to you, I'm not worried about Apple.

Are you?

Andres Barreto

September 8, 2007 7:09 PM

I agree with Nathan, the value of slashing the price of the iphone for apple is not merely shear profit per unit sold, but also the bundle of many lock-in services that can bring more revenue flow, not only in subscription like Olga mentioned, but also on services like iTunes, rigntones, and other revenue generating services.

Patentsandmore

September 9, 2007 1:01 AM

One concern regarding your analysis of economies of scale. The analysis fails to consider manufacturing costs differences based on economies of scale. The cost of manufacturing remains consistent for both prices in your example, however, when a company takes advantage of the economies of scale, they theoretically get a lower manufacturing cost because of the larger order for parts and number of units manufactured that can be fulfilled.

It would be more accurate to suggest that the unlike the original cost of 265 per unit when selling 8 units, selling 18 units would cost less to manufacture than 265 per unit (the order number would double, and the cost to manufacture would go down) because of economies of scale. Thus, economies of scale would allow the profit resulting from the lower manufacturing costs to be more similar to if not more than the profit in the first price.

Adid

September 22, 2007 2:23 AM

To Patentsandmore.... Before Apple reduced their prices, they were not meeting their projected sales quotas. Now, they are beginning to meet the projected sales and are keeping up with the usual data. Meaning, that your proposal should almost be reversed because before they were selling less than they can order, now it is just right... Sorry, but they aren't getting a discount on their prices anytime soon...

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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