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.