When Apple Inc. (NASDAQ: AAPL) launches the iPhone 6, its management needs to struggle with the balance between the product’s features and the price it charges. Rumors are that the smartphone’s rival, the Samsung Galaxy 5S, may sell for as much as $600. Presumably, the South Korean company believes the product’s new features will be such a tremendous advance in technology that a premium price will not sink sales. And many analysts believe Samsung makes very little on its phones, despite their massive sales volume. An increase in price may be its only option to make large profits. Apple, on the other hand, makes great margins on the iPhone. However, it may have to trade off price to gain back market share lost to Samsung.
Apple’s iPhone 5 price followed management’s normal pattern of offering the smartphone with a wide array of options. The 5c is priced at $99. At the high end of the product line, an unlocked 5s retails for as much as $849. But most people buy smartphones married with some form of wireless subscriber plan, and that is where Apple will need to take the most risk with its pricing.
With service plans from AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ) or Sprint Corp. (NYSE: S), the iPhone 5s price ranges from $199 for the 16GB model to $399 for the 64GB version. Apple executives do not disclose in detail which among the many models sells the best. But management clearly thinks that, for the iPhone 5s, $400 represents a price barrier.
The rumors are that the iPhone 6 may have a display size of nearly six inches and a faster A8 chip. If this is the extent of the most prominent features, Apple management will take a gamble with a price point above $400.
On the other hand, Apple may offer revolutionary voice recognition or a next generation camera and video recording features. If so, management may try to push the price envelope aggressively.
Wall Street will be disappointed if iPhone 6 sales in its first full quarter fail to reach well above the 51 million iPhones sold in the most recently reported quarter. A low price point may trigger much higher sales, but it also will erode Apple’s closely watched gross margins, which have recently run about 38%.
Apple will disclose both the features and the price of the iPhone 6 sometime in the next several months. If it prices the smartphone above $500, management must believe that it has jumped well ahead of its rivals in terms of the appeal of the product to consumers.
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