The $999 price tag on Apple's (NASDAQ:AAPL) new iPhone X may sound brutal to consumers, but investors should love it. Here's why: Millions of customers will still readily pay up for the new device.
Apple has long been known for its impressive pricing power. And this pricing power has been demonstrated recently, providing the perfect storm for a $999 bombshell. Apple's newest flagship phone and the company's wise decision to keep selling lower-priced phones as well mean Apple looks positioned to see iPhone revenue jump in fiscal 2018.
Evidence of Apple's pricing power
It could be said that Apple's decision to release a new iPhone at a $999 price point is evidence, in and of itself, of the company's pricing power. The world's most valuable publicly traded company undoubtedly carefully considers how it prices its most important product. With the iPhone accounting for 63% of Apple's trailing-12-month revenue, you can bet management wants to price its new iPhones in a way that maximizes total revenue.
But there's no need to rely on such speculative evidence of Apple's pricing power. Just look back at the last time Apple announced a meaningfully higher-priced iPhone model.
Consider Apple's fiscal 2015 -- the first full year of iPhone 6 and 6 Plus sales, and the last time Apple overhauled the iPhone's form factor. The year's iPhone product cycle marked the first time Apple introduced a higher-priced version of the iPhone. The iPhone 6 Plus started at $100 more than the iPhone 6, yet it proved to be popular with consumers. Driven by iPhone 6 Plus sales, the average selling price of Apple's iPhone increased from $599 in fiscal 2014 to $669 in fiscal 2015. In addition, Apple's iPhone revenue soared much faster than iPhone unit sales during this period. Fiscal 2015 iPhone revenue jumped 52%, while iPhone unit sales increased 37%. The introduction of a higher-priced iPhone worked wonders on Apple's financial results.
Meanwhile, Apple's average selling price for its iPhones has remained well above fiscal 2014 levels. Apple's trailing-12-month average selling price for its iPhone sales is $643.
Sure, higher prices may make unit sales growth less notable than if Apple were to price the iPhone X more aggressively. But any negative impact higher prices have on unit sales growth will likely be more than offset by the incremental unit revenue from a higher average selling price.
A clever iPhone lineup
Still, $999 is downright expensive for a phone -- even if it's Apple's best smartphone yet. Some consumers who regularly upgrade to new iPhones may pass on this device because it's simply priced too high. But this is where Apple's freshly fortified lineup of iPhones at different price points can effectively come into play. Alongside the iPhone X, Apple also announced a new iPhone 8 and 8 Plus. The new iPhone 8 has a much lower starting price of $699, and the iPhone 8 Plus starts at $799.
Further, customers who still aren't willing to pay these prices can buy the iPhone 7 or 7 Plus at a reduced price of $549 or $669 ($100 lower than before the iPhone X event), respectively. Further, Apple's lowest-priced iPhone, the iPhone SE, can now be bought for $349.
Thanks to Apple's clever iPhone lineup covering a large range of price points, investors should see the iPhone X as a wise move to up-sell some of its millions of loyal customers who have already shown a tendency to pay up when Apple launches higher-priced products.