Here is Why the iPhone 5c is Going to Cost You US$550 And Not $350-400 as Expected

  • September 13, 2013

iPhone 5c

Here is Why the iPhone 5c is Going to Cost You US$550 And Not $350-400 as Expected

Like many of you, I was surprised at the price tag of the iPhone 5c. I was sure Apple needed to make a play for the low to medium smartphone market or faced being disrupted by cheaper smartphones from other companies. Especially in crucial markets such as China and India.

In my piece, The Church of Profit Share vs the Church of Market Share, I said it was it was time Apple stop focusing on profit share and make the necessary moves to shore up their market share in developing nations.

Over the last few days, I’ve changed my views on this. In fact, I’m now convinced that the company has done the right thing by not going after market share with a cheap iPhone at this time.

I believe there are several reasons why Apple is selling the iPhone 5c for $550 instead of $400. And those who say the company is only doing this to increase its profit margin, is totally shortsighted.

Here are the key reasons:

Protecting its image as a premium brand

“Apple: It’s All About the Brand,” is the headline of a Wired report in 2002. This remains true to this day. And more importantly, the company is well aware of this. The company had built up its reputation through selling premium products. As a result, Apple needs to price its products accordingly to support this image in the eyes of consumers around the world. Asking the company to move away from this path is like asking Mercedes or Audi to build affordable cars for consumers in India and China. The iPhone is basically a status symbol.

“Without the brand, Apple would be dead,” Marketer Marc Gobe, author of Emotional Branding said. “Absolutely. Completely. The brand is all they’ve got. The power of their branding is all that keeps them alive. It’s got nothing to do with products.”

Another interesting quote on Apple brand credential is by reader Ken Cheng on   Apple 2.0 blog:

Lower prices thru lower quality product also lowers perceived value. As an aspirational brand in China, Apple is perceived as the Louis Vuitton of tech. Look at where Apple Stores are located in Shanghai. They’re on the most exclusive and expensive shopping streets in Shanghai, Huaihai Road and East Nanjing Street. In Pudong, you have a store that mimics the 5th Avenue NY store, with its iconic location. So, on the one hand, Apple has pressure to reach more of the market by lowering prices, but on the other, Apple must balance that by not lowering value, as that would hurt the brand image that it has worked so hard to achieve. It’s a delicate balancing act.

Lack of stickiness in Apple’s ecosystem 

People looking for Cheap iPhone are unlikely to spend much on the app. This is not good for Apple’s business strategy.

Consequently, these consumers would readily switch from Apple to another competitor. Apple would be wasting time and money going after a market that won’t add much value to its bottom line in the long run. Apple is better off signing new deals with NTT DoCoMo and China Mobile to expand its market share. A recent report suggests that, “NTT DoCoMo has offered the 40 percent quota to Apple as a concession to land the bestselling smartphone.” And according to various reports, a China Mobile deal is on its way.

My theory is that one affluent owner of an iPhone 5s equates to three owners of an iPhone 5c costing $350. So in practice, Apple wants more of those affluent consumers and not the other way round. Tim Cook recently stated that many owners of low-cost Android phone use them as feature phones. These people are unlikely to get locked into Apple’s ecosystem since they won’t be buying enough apps and media from iTunes.
For example:
Let us say an iPhone cost $40 to manufacture.Apple can sell 3,000 iPhones @ $50 = $150,000 make $30,000 profit (Samsung’s approach)

500 iPhones @ $100 = $50,000 and make $30,000.
The real money is on the second option, because these buyers are more likely to have more disposable incomes and tied themselves into Apple’s ecosystem. The second option also maintains Apple’s image as a premium brand. This is the way we need to think of Apple’s business strategy. The high price is not just for profit margin, there are other factors at play.
My sentiment was echoed by  a reader – RadarTheCat on   Apple 2.0 blog
 [Apple] may lose market share, but the game in smartphones for Apple is to capture a significant share of more affluent smartphone users; those who will purchase more content for their phones. App spending per user is one of two significant factors developers look at when determining which platform to support; the other being overall number of users. I think Apple understands it cannot win in the war for overall number of users, so its focusing its efforts on building a base of affluent and engaged users.”
This brings me to the next point…

The one thing that keeps iPhone ahead of its competitors is the App Store. The majority of developers continue to see Apple as the go to platform when making their app

In Feburary,  Apple announced that it has paid developers over 8 Billion. No other mobile platform has achieved this figure. Developers love the App Store simply because consumers are willing to pay decent money for their apps. This is not the case on competing platform such as Android. A recent study by OPA found that, “70% of iPhone content consumers have bought apps in the past year, compared to 34% of those on Android; iPhone content consumers also spend more on apps than those using Android.”

To close, Apple is not interesting in just selling an iPhone. They are trying to sell an ecosystem/lifestyle. Apple is hoping that a person who bought an iPhone will buy lots of apps. In turn, this person may want an iPad or Mac PC to go with his/her iPhone. Hence, the company is targeting people with enough disposable income to buy into their ecosystem and stay there. I’m not sure someone who could only afford a $350 iPhone fits this profile.

This will only result in Apple is increasing its market share at the cost of brand dilution, cut income for developers due to poor sales and fickle consumers leaving Apple’s ecosystem for something new at the drop of a hat. Hence, the iPhone 5c is not priced at $550.

I believe that smart folks at Apples knows that an iPhone 5c with a $350-$400 price tag is nothing more than a bag of hurt.

Posted by | Posted at September 13, 2013 10:31 | Tags: , , ,
Storm is a technology enthusiast, who resides in the UK. He enjoys reading and writing about technology.

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