Understanding The iPhone Pricing and Segmentation

In my mind, the key to yesterday is to understand how the iPhone is segmenting and the role the pricing structure plays on the segmentation.

Everyone, including myself, was convinced that Apple was going to be more aggressive with the pricing of the iPhone 5c. Now, looking back, it should be obvious that Apple has not really changed much in the way of their strategy. They did fragment the iPhone line as many expected. They did introduce a ‘new’ product at slightly lower price point. But they did not do what many thought, which was hit a price point that fully targets more unsubsidized and pre-paid markets.

That being said, there is more to the pricing strategy than meets the eye.

Understanding the Segmentation

Over the last few years, Apple has sold a current generation iPhone along side several last years models at discounted prices. From looking at the sales announcements from many carriers, we know that later generation iPhones sell extremely well. Verizon even reported that half of their iPhone activations were non-LTE, meaning the 4S. This just goes to show you the strength, even in the US, of devices at the $99 subsidized price range.

Outside of the US, and in many areas of Europe, the price of handsets vary much more than they do in the US. Carriers can acquire the devices at their wholesale prices and offer them at whatever cost they want to acquire new customers. In the US we see Walmart do this from time to time with the price of the iPhone 5. Walmart just recently dropped the price to $98 of the iPhone 5 with a 2-year contract. They can do this because of the cost structure deal they have to carry the device and incentives on contracts. Couple that with the fact that people don’t go to Walmart just to buy iPhones and you can see how they can make up some perceived cost losses with additional items bought in store.

For many carriers the iPhone does a similar job on their network that it does for Walmart in stores. Carriers hire the iPhone to drive up their average revenue per user. The iPhone is the undisputed leader for network operators in driving ARPU. The iPhone 5c gives them some leverage to be creative with their pricing of the device in order to acquire new customers and drive higher ARPU than they could before with the premium iPhone model.

Take a look at the chart below and the iOS share of web traffic in specific countries.

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This demonstrates the good job the iPhone does in driving premium data services. In regions still trying to drive LTE users and monetize the massive investments they have in network infrastructure, the iPhone is the best product for the job.

Looking at the lineup, I will not be surprised if the iPhone 5c becomes the larger share of iPhone sales. Thus Apple has created a phone for everyone, or at least most, and a premium phone to aspire for. This is segmentation at its best.

Economies of Scale

One other element to watch with the 5c is whether the price may come down as manufacturing economies of scale allow. Since the casing is using a process much less complex in the finishing and machining than the 5 and 5s, it may allow for economies of scale to allow for better pricing.

This of course may not be evident in anything other than the carriers ability to be creative with the pricing. It will be interesting to see if the pricing carriers have with the iPhone are the same in six months time or less.

Overall Apple’s competition has never been up against a current generation product line. They have been up against a single new iPhone in two different colors. Previously Apple had two current generation iPhone choices for consumers. Now they have eight.

I’ve always said that it took an army of Android devices to compete with Apple. Now Apple is creating it’s own army. I do have to imagine competitors are a little nervous.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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