Strangely enough, the iPhone 5c may end up having been one of the most important iPhone launches in Apple (AAPL 0.52%) 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.
