Here's the Reason Apple Inc. Will Charge More for the iPhone 6

Strangely enough, the iPhone 5c may end up having been one of the most important iPhone launches in Apple (NASDAQ: AAPL  ) history. While iPhone 5c unit sales came in below expectations, the 5c taught Apple a valuable lesson: A larger-than-expected percentage of Apple customers are willing to pay a premium for premium iPhone features. Based on the the iPhone 5c experience, Apple is probably confident it can charge $299 -- on a two-year contract -- for a larger-screen iPhone 6.

In a maturing market, company revenue growth can come from two sources: It can capture market share from the competition, or it can charge a higher price for products. The iPhone 6 may be a way for Apple to accomplish both goals.

The iPhone 5c story: Apple customers will trade up
As the smartphone market matures, it has become increasingly difficult for Apple to deliver the high growth rates that the company's investors have come to expect. The iPhone 5c, introduced in last fall, was seen as a way for the folks in Cupertino to expand the iPhone's reach into the mid-price smartphone market. iPhone 5c pricing begins at $99, on contract -- a savings of $100 over the iPhone 5s.

Despite its lower price, unit sales of the iPhone 5c came in significantly below Apple's forecast. However, unit sales for the iPhone 5s exceeded company expectations, with iPhone 5s shortages throughout the holiday quarter. Apple's lesson? A savings of $100 doesn't move its customers to a lower-priced smartphone at the rate the company expected. Overall, Apple customers tend to trade up to the premium-priced, premium-feature iPhones. In addition, the iPhone 5c may have provided an unforeseen bait-and-switch effect, with the 5c acting as the bait to lure additional customers into stores, only to have the shoppers switch to the higher priced iPhone 5s.

The iPad: Customers trade up as well
Sales data from CIRP again demonstrates the tendency for Apple customers to pay more for devices with premium features. In December 2012, lower-priced iPads -- iPad 2 and iPad Mini -- represented 57% of sales. In 2013, Apple released two higher-priced iPad models with significant feature improvement: the iPad Air and the iPad Mini with Retina Display. These tablets increased year-over-year premium-price iPad sales -- Air and Mini with Retina -- by 14 percentage points, accounting for 57% of iPad unit sales. While the percentage sales of the lower-priced alternatives, the iPad 2, iPad with Retina Display, and iPad Mini, dropped to 43%

Source: CIRP

Will a larger-screen iPhone 6 support a $299 price?
Large-screen smartphones represent 22% of smartphone shipments, indicating a significant market exists for larger-screen devices. Samsung, Apple's biggest competitor, builds both of its premium-priced smartphones models with screen sizes that are significantly larger than the iPhone 5s' 4-inch screen. The Galaxy 5s has a 5.1-inch screen, while the Galaxy Note 3 boasts a 5.5-inch screen. While the Galaxy 5s has the same on-contract price as the iPhone 5s, Samsung charges a $100 premium for the larger-screen Galaxy Note 3, providing some precedent for a $299 iPhone 6.

Given the demand for larger-screen smartphones, the iPhone's position as a premium device, the willingness of Apple customers to pay more for premium features, and the success of the $299 Galaxy Note 3, it seems likely that the iPhone 6 can support a price of $299. Apple will likely continue to offer a 4-inch iPhone at $199 while pricing the larger-screen iPhone 6 at $299. The iPhone 6 will help the company find additional growth in a maturing category by attracting new users that prefer a larger-screen smartphone, while offering an incentive for existing iPhone users to move up to a higher pricing tier.

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Read/Post Comments (8) | Recommend This Article (15)

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  • Report this Comment On April 19, 2014, at 7:59 PM, applefan1 wrote:

    Here's the situation from my perspective.

    The 5C probably didn't sell as well as the 5S for several reasons. One, it was only a 32 bit processor instead of a 64 bit processor and it is a second tier product and every time Apple releases a new flagship phone, that's the phone that typically gets most of the attention and sales. It wasn't meant to be a low cost phone, it was meant to be the replacement for the 5 as it transitioned to the second tier status and they wanted to lower costs and in doing so they also increased the battery life.

    Now, with regards to the so-called iPhone 6, if it is a larger screen model, then obviously it will cost more because of the larger screen, but there is nothing that says that Apple won't update the 5S into a 6S and offer a 4 inch model with an upgraded processor, etc. etc.

    Samsung charges more as the screen size goes up. Look at the Samsung's pricing for their top end 4inch model, 5 inch model and 5.5 inch model. The MSRP goes up, the problem is that Samsung isn't making metal cases, they are using cheaper polycarb cases and they are STILL 32 bit processors.

    Who knows outside of Apple what Apple is ultimately going to do. Most of the time pre-release announcements that are over day ahead of the launch are usually filled with speculation that turns out not to always be the truth.

    There are plenty of things that are STILL up in the air about the next iPhone product release. Obviously, it's probably a high percentage probability that it will be a larger screen and I think sales WILL be through the roof and Apple may in fact get a lot of Android switchers because they will see that they not only get the larger screen they want, but 64 bit processing, and maybe some other surprises that aren't available on Android platform.

    If i were Samsung, I would be getting ready to just get ready to lose major amounts of profitable business on the higher end smartphone market and be only selling the cheap, no profit products, which will affect their bottom line. If you are an investor, it might be wise to invest in Apple and hang on for the ride as it might last a few years if Apple is working on a lot of other things to increases Gross Sales and Net Profits. Obviously, they have to be ramping up for high production levels since they are basically capped at how much production they can crank out.

    If I were looking at Apple, I would be looking into the production capabilities to find out how many of these suckers they can produce along with the other models. Not everyone is going to automatically switch from 4inch to 5 inch, I still think that a lot of people will switch, but Apple should get a lot of switchers as Apple lost that market segment over the past two years, but I think a lot of those people are willing to come back to Apple due to it being 64 bit and other advances not achieved by Samsung/Android.

  • Report this Comment On April 20, 2014, at 11:36 AM, RaphaniacZX wrote:

    Galaxy 5s?

    You meant to say Galaxy S5

    I know Samsung makes it difficult to show it's differences. But it's not that complicated.

  • Report this Comment On April 20, 2014, at 12:51 PM, bshamblin wrote:

    Raphaniac - thanks for catching that - working to get that corrected.

  • Report this Comment On April 20, 2014, at 7:59 PM, moopert wrote:

    Why they will? Quite frankly cause they can. It has never mattered that there phones are more expensive when all you're really paying for is the little apple logo on the back. People will flock to it in droves.

  • Report this Comment On April 20, 2014, at 10:25 PM, ocpw wrote:

    With 103 million retail connections Verizon is the largest carrier in the US. In its fourth quarter last year alone Verizon activated 6.2 million iPhones out of a total of 9.8 million smart phone activations. Yet the iPhone still cannot do simultaneous voice and data on the Verizon network and that one fact remains both a serious safety issue and a threat to the continued success of the iPhone if Apple continues to ignore the problem. Think about it. If you are a parent on the phone with your child do you want your child to be forced to hang up the phone to access maps. Or a family member or an emergency worker searching for survivors. I am no Apple basher. I own two Macs, two MacBook Pros and three iPhones. Obviously I am not cheap. But I choose to be on the Verizon network and if Apple does not fix the problem with its next release I will drop the iPhone like a lead balloon and I would strongly recommend that anyone else on the Verizon to reconsider their needs before choosing the iPhone. Especially parents, law enforcement and emergency service workers.

  • Report this Comment On April 21, 2014, at 1:28 AM, aardman wrote:

    Not being able to simultaneously transmit voice and data is now a "serious safety issue"?

    Of course anyone can come up with a scenario in which such a shortcoming can result in tragedy. But in this age of widespread innumeracy, hardly anyone will ask "What're the odds of that happening compared to other perils out there?"

    Let's stop scaring ourselves over low probability events even as we neglect less sexy but more likely sources of danger.

  • Report this Comment On April 21, 2014, at 2:47 AM, ocpw wrote:

    @aardman: Yes. It is serious. Thanks to smart phones we now have more options. Among them is preparedness and preparedness is a serious safety issue. The Osa, Washington mudslide is only one of many natural disasters we have witnessed over recent years. Would you seriously take the option of simultaneous voice communications and data transmission away from firefighters and rescue workers by recommending the iPhone on the Verizon network? Its a problem whether you choose to recognize it or not which effects a major segment of our population. Pick any recent individual or mass tragedy and in almost every single case smart phones played a part. If I were an institutional investor in Apple with an interest wanting more and not less market share for the iPhone I would be raising the issue at the next stock holder's meeting

  • Report this Comment On April 21, 2014, at 2:55 AM, ocpw wrote:

    @aardman: Korean parents were on their phones with their children during more than 30 minutes before the South Korean ferry Sewol sank. The issue may be laughable to you. But, I can assure you that smart phone evidence will play a major role in evaluating events leading to the tragedy and to evaluating the actions and or inactions of the captain and crew.

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Bill Shamblin

Market analyst, economist, stat geek, and comedy writer. My goal at The Fool? Tell the story behind the numbers. I've developed competitive analysis for Fortune 500 companies, managed an econometric model of US price and wage indices, and written comedy for syndicated radio programs. BA economics/computer science, University of Maryland. MBA Georgia Institute of Technology. Follow me at: @bshammy

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