Few months ago, I noted that for Apple to compete in this new age of mobile device competition, it must reduce its prices on iPhone. My thesis was based on product maturity construct where hardware products over time become fairly good enough that customers may be open to try new brands. In other words, unlike say six years ago, one can now get really great Chinese phones that cost far less than the iPhone, while delivering decent and acceptable composite value. Under that scenario, the hardware differentiation within the software exclusivity that Apple has used to increase prices of iPhone products will hit a ceiling. Simply, any marginal increase will push many to drop the Apple brand for an alternative. The iPhone X was a good experiment for Apple; the result was that you cannot just keep increasing prices without losing customers!
Fast forward to last quarter, Apple made some changes. Yes, Apple reduced the prices on iPhone and in the process stabilized China iPhone sales. The results were not clearly pretty—profits and revenues fell, and iPhone sales dropped by 17%, their sharpest decline ever—but executives said price cuts in China led to a pickup toward the end of the quarter, sending shares up more than 10% in after-hours trading, as reported by Quartz.
Today, Apple is a service company. Service companies win with volume. The implication is that having many people using Apple devices will help deliver the volume needed for any service-based strategy to work. So the news that Apple is reducing prices while having marginal improvement on its products makes a lot of sense.
iPhone 11, iPhone 11 pro and iPhone 11 pro max came as the phone newbies of the year.
The new products are not quite different from the ones introduced last year, though there is camera system upgrade to allow for wide-angle photos. There is also an upgrade in battery capacity, such that it could last a few hours more than the predecessors.
Speed is also another new feature that differentiates the new from the old. A bit of it makes the trio faster than the predecessors.
Then they came with ridiculous prices that beat the expectation of users. iPhone 11 at $699 is $50 cheaper than its predecessor, the iPhone XR. iPhone 11 pro costs $999 while iPhone 11 pro max sells for $1, 099 .
This week, Apple unveiled Apple Games with $5 monthly subscription, Apple TV+ with $5 subscription besides the iPhone, iPad and watch. The subscriptions will be motivations for Apple to reduce its hardware prices. The company will continue to go deeper into this price reduction. By Apple iPhone 15 which is largely four generations away, the iPhone pricing will reach an inflection point that it could go mainstream in Africa. In other words, the prices will be affordable enough for large adoption in Africa. That price has to come down from $699 to say $450 as I have maintained: “This strategy will become very clear in coming quarters. I have noted that Apple must have a phone with price range in the neighborhood of $300-$450.”
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Yet, Apple has to be very strategic in its pricing. My suggestion is this: increase the price of the highest version of iPhone to $1,200 and make it more premium. And then introduce a phone brand called Apple and make the price $350. Make the design of Apple (the phone brand) to be radically different so that you do not cannibalize the premium iPhone. By having these two brands, Apple can compete in both the upper and lower segments of the markets. We will have Apples in Nigeria while they will sell their iPhones in New York. This is similar to Toyota selling Lexus and Honda selling Acura.
Apple as a service company has to optimize its addressable market which means working hard to have many people to use its hardware – the more people, the better. That differs clearly for mainly vertically-focused hardware companies which dwell on the differentiation of their gadgets to win customers. By reducing hardware price, typical for service-inclined business, Apple will be pursuing a horizontal strategy and that means Africa could become an important part of its future. It is decreasing prices – it wants more users for its services. Fortune captured its thus, “It was a day of price decreases and incremental product improvements that might have been mistaken for a shutterbug convention.”
This is a huge iReversal which is typical when a hardware company pursues a service strategy. Apple iPhone has to become more affordable and I expect this trajectory to continue.
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There are many things at play, even the pundits and experts sometimes don’t have all the answers.
Apple is playing a twin game of maintaining the aura of high-end hardware, while also increasing the user (services) base.
Another thing at play is the state of global economy, which is shrinking in many places – including China; you cannot be increasing prices of smartphones when most economies are entering recession, Apple is not that daft.
Again, there is drop in global shipment of smartphones, it’s not just on Apple, rather some users are becoming more economical, so instead of changing phone yearly, you do so once in two years!
As for Africa becoming a key market for Apple within five years, I think it will depend more on growth of the economies and higher purchasing power of citizens, rather than reduction of iPhone prices. $450 is still a lot money here, and it will remain so in another five years.
Lastly, most Africans aren’t ready for subscription services which Apple is targeting, so reducing the price of hardware without balancing it with greater consumption of services is still counterproductive; we are not there yet.
In the meantime, let’s enjoy what is before us, expect many twists and turns in few quarters.
What a summary – “Apple is playing a twin game of maintaining the aura of high-end hardware, while also increasing the user (services) base”
Will be watching closely as the play continues. Thanks prof for the good work