Could the Not-So-Cheap iPhone 5C Disappoint?

iPhone 5C. Source: Apple.

Going into yesterday's iPhone announcement, the biggest unanswered question was the iPhone 5C's pricing. The phone was largely expected to have an unsubsidized price somewhere between $400 and $500.

We were way off mark. Apple's (NASDAQ: AAPL  )  iPhone 5C retails for $549 -- just $100 less than the iPhone 5S. With shares down about 5% today, investors clearly disagree with the pricing decision. What's Apple thinking?

What about the important Chinese market?
The mid-tier smartphone market in China is in the $300 to $400 range, according to Wedge Partners analyst Jun Zhang. At $549, Apple wasn't even close. If the company managed to pull off a pricing point in the $400 to $500 range, it would at least be borderline. But $549?

And, of course, U.S. iPhone prices don't carry over very gracefully into China. According to Apple's China website, the 16GB iPhone 5C retails for RMB 4,488, or a whopping $733.

There's no way around it: Apple simply isn't gunning for the mid-tier smartphone market.

Fortunately, however, Apple didn't kill the iPhone 4 in China like it did in the U.S. It's arguably the only iPhone that lands in the mid-tier with a retail price of RMB 2588, or $423. Even so, the iPhone 4 is a three-year-old iPhone. Will this aging technology continue to sell?

For many investors, Apple's pricing decision for the iPhone 5C is disappointing news. The opportunity in China is enormous. In the second quarter, Apple's iPhone shipments accounted for just 4.8% of all smartphone shipments in the country, according to recent data from Canalys. There is a large untapped market that Apple isn't attracting, and it doesn't look like that's going to change.

So what is Apple's strategy?
Margins.

Apple will be able to collect much higher up-front profit at $549. Piper Jaffray's Gene Munster believed that the iPhone 5C would carry a 15% gross profit margin at an unsubsidized price of $300. If his estimates of Apple's component costs for the 5C were correct, the plastic-backed smartphone would likely boast a monstrous gross profit margin. Even if he underestimated the 5C costs, the smartphone's $549 price tag still merits an impressive gross profit margin.

Will the strategy work?
Though Apple didn't improve its value proposition to the mid-tier smartphone market in China, the company did manage to beef up its offering in the high-end segment.

The iPhone 5s boasts some impressive improvements. The 5C maintains the 5's CPU power while adding some flair with five bright colors and improving battery life. And with the elimination of the iPhone 5, there is a clear hierarchy and a strategic pricing strategy among the three top iPhone models: the iPhone 5S, 5C, and 4S.

If Apple can successfully market these models and make up its lack of volume with excellent profit margins, the company could surprise investors. But at this point, Apple will have to prove that this pricing strategy will work because it's not what anyone expected.

What do you think? Is Apple's strategy to focus on profit margins the right decision?

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2013, at 7:31 PM, cazic99 wrote:

    5C is for emerging market called KIDS, people are missing this completely. a 13 year girl walks into the ATT store with mom, is she going to chose the Space gray 5S with high tech finger print scanner for $199, the generic Samsung or other androids for $199,99,$49 or the hot pink brand new Apple 5C for $99. Think about that for a second...This is Apple's genius...And why they are making all the money and other comapnies are scraping the bottom

  • Report this Comment On September 11, 2013, at 8:00 PM, garysund wrote:

    I don't think the price is high at all. You have to look at it from a marketing point of view. You can go into your carrier and get the iphone 4 for free. For $99 you can get the cool looking new iphone 5c. If you are a high end customer you go for a upgrade to the iphone 5s. Lots of options for a newbie and a nice upgrade of the die hard apple fan. Don't forget the trade in deals that are out there too. Just wait until the January earnings report to see if this was a good or bad move. I would bet in favor of it being not only a good move but a act of genius marketing.

  • Report this Comment On September 11, 2013, at 8:49 PM, jonah11378 wrote:

    "impressive improvement"...you jest

    Nokia came out with a 41mega pixel camera, hypersensitive screen, a display that can be seen in direct sunlight, Camera pro with manual focus, iso, exposure, shutter speed, and white balance, not mention the speed and fluidity of windows OS, that is innovation, Motorola had fingerprint in their Atrix phone, where is that now again?

  • Report this Comment On September 11, 2013, at 8:50 PM, jonah11378 wrote:

    549 dollars is not expensive???? the lumia 520 is 99, and the lumia 928 is 450 and it has a better camera and flash???? Don't get me started on the lumia 925 or lumia 1020

  • Report this Comment On September 11, 2013, at 9:12 PM, Jjkiam wrote:

    Funny how very few articles or commenters realize that Apple has the ability to ALWAYS lower it's prices on the 5C. Perhaps the pending deal with CM anticipates this and by including the 4S as an additional option, we have the low cost Emerging markets option already available. One thing is certain that the new 5s with a 64 bit chip architecture and the start to true biometric security with the fingerprint sensor Apple has set a new bar in smartphones that others will be scrambling to follow. Let's see how the initial sales perform before we write them off as dead in the water

  • Report this Comment On September 12, 2013, at 12:05 AM, techanalyst1 wrote:

    A KID wants a B I G screen and correct me if I'm wrong...... Apple doesn't have one.

    I want a big screen and apple doesn't have one for me either.

    And the biggest issue with MY phone is it has unlimited data and texts and that goes away if I get a new phone so it ain't happening.

  • Report this Comment On September 12, 2013, at 5:44 PM, TMFDanielSparks wrote:

    Keep in mind. The price is $549 here... but $733 in China where average incomes are far lower and the market is much, much larger.

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