My last post reviewed relative pricing of old vs. new iPhone models. Now let’s take a look at the approach they use to make it appear as though their price is lower than it actually is.
Let me first say, I got these figures from the internet. So they are illustrative, at best. Apple is very guarded about its strategy and pricing, and cost figures are no exception, so confirmed accurate information is difficult to come by. No matter, the figures here are directionally correct and close enough to illustrate the approach they are using.
If you purchase an iPhone 5 from Verizon, the price you are quoted is $199. But you must sign-up for a two year contract. They are willing to sell you the phone for $199 because some of the price of the phone is built into the contract. “How much, you ask?” About $461 worth, that’s how much. You can arrive at this figure by comparing the contract and non-contract prices. By the way, purchasing agents do this all the time. They will ask for bundled and unbundled prices in order to determine the value of each piece within a bundled offer.
If you purchase an iPhone 5 outright, without a contract or anything, you can get it for $649, maybe better. The difference between the stand alone price and the price bundled with phone service is $461. That is the amount of the two loans you take out when you purchase an iPhone 5. Why do I say it’s a loan? Because if you cancel your contract, the unpaid portion of that loan comes due and you owe Verizon a check above and beyond your last month of service to pay off the equipment.
Do you think people would buy iPhones if they realized they are paying for the equivalent of a personal computer for a phone? I don’t know, but it’s a brilliant strategy as long as they do. For each iPhone 5 sold, Apple is essentially able to make 2-3 iPhones, a computer or an iPad or two. The financial strength they are building through iPhone sales is truly staggering. No wonder they are the most highly valued business on the planet.
So buy stock now right? … well maybe. While this is definitely building Apple’s war chest, they still have to spend the winnings wisely. Also, there are some things that may negatively affect this value proposition for Apple. It requires Verizon’s cooperation because they are collecting the money and passing it on to Apple. Clearly, there is profit in it for Verizon. BUT, what if the phone companies begin competing on price again? It’s been known to happen. Does anyone out there remember being paid to switch phone companies? If Verizon were to stop selling phones and just tell their customers to buy their own phones, Apple’s strategy would almost certainly collapse. I can’t see loads of people ponying up over $600 for a phone.
What do you think? Is the iCloud connectivity etc. worth the premium? Is there an opportunity for you to restructure the way the customer sees your value to separate the price from the value more effectively?