Apple (NASDAQ:AAPL) is exercising its pricing power this year in a big way -- and in more ways than one. The most obvious example is the iPhone X and its $1,000 price tag, but the iPhone 8 and 8 Plus also received modest price bumps this year. Those devices now start at around $700 and $800, respectively, up from around $650 and $770, respectively, for last year's comparable models.

We already knew that the company was boosting the base storage configurations from 32 GB to 64 GB, but that only partially explains the bump, especially as the difference in costs for Apple is a few dollars for more storage. Bloomberg is now reporting more detail behind Apple's cost structure, citing an analysis from IHS Markit.

iPhone 8 and 8 Plus being splashed with water

Image source: Apple.

Passing along costs to the consumer

Here's a cost breakdown of how this year's models compare to last year's models (at launch). iPhone 7 and 7 Plus prices dropped by $100 following the launch of the 2017 lineup. We can then calculate an estimated hardware margin, which is slightly different from gross margin. There are many other factors that go into overall gross margin, such as marketing costs, software development costs, warranty and return accruals, and amortization of manufacturing infrastructure.


Bill of Materials (BOM)

Retail Price

Hardware Margin

iPhone 8




iPhone 7

$237.94 (at launch)

$649 (at launch)


iPhone 8 Plus




iPhone 7 Plus

$270.88 (at launch)

$769 (at launch)


Data source: IHS Markit via Bloomberg and author's calculations.

As far as the main cost drivers, the most meaningful changes were the new base storage configurations, the improved camera system, the new A11 Bionic chip, and the switch to a glass back. The move to 64 GB costs an extra $6 per unit, while the A11 Bionic is $5 more expensive compared to last year since it's built on Taiwan Semiconductor's newer 10-nanometer FinFET process.

Investors should note that the implied hardware margin is remarkably consistent. Within this tier of the iPhone lineup, which used to be reserved for the flagship device, Apple is doing a good job at maintaining the iPhone's margin profile. In contrast, the iPhone X is expected to take a huge hit in profitability -- despite its hefty price tag -- because it's crazy expensive to build. Susquehanna recently estimated the iPhone X BOM at $581, implying a 42% hardware margin.

CEO Tim Cook has previously warned investors against reading too deeply in these types of third-party BOM estimates, and it's worth noting that we're looking at estimates from two different researchers (IHS and Susquehanna). Still, if the estimates are remotely accurate, then Apple will face some margin headwinds in coming quarters as it works to ramp iPhone X production. Demand expectedly appears to be concentrated on iPhone X, and manufacturing delays for that model only appear to be getting worse.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.