The Role of Marketing and Business Models in iPhone ASPs

With the launch of new iPhones this week, and specifically the creation of a fourth tier in the current generation lineup, I’ve been talking to people over the last couple of days about price quite a bit, and thinking about average selling prices for iPhones, and how Apple has been able to raise ASPs even as it’s extended the iPhone lineup down market, which is a pretty unusual feat.

A brief history of iPhone pricing

A good place to start this analysis is with a brief review of the last few years’ iPhone lineup and the price range implied by it, as well as the average selling prices that resulted from it. The diagram below shows how the iPhone lineup has expanded over the last few years from a single current model to four (ignoring the fact that older models have stuck around at discounted prices as well):

That expansion in the range largely reflects the maturation of the market – when markets are in their infancy, product lines can be simple because there’s plenty of addressable market to go around, but as they mature and become increasingly saturated, diversification in the product line becomes necessary to meet a wider range of use cases for increasingly sophisticated buyers. It was also clearly in part a response to competitive moves to offer larger phones in the case of the Plus line.

The chart below shows what’s happened to the price range and average selling prices as a result (in each case, the year refers to the year in which products were launched, with the ASP being the average price per shipment during the four quarters from launch). In this case, the lowest price available does include older phones sold at discounted prices, and I’ve included a pretty modest guesstimate for this year’s ASP, which could well be quite a bit higher depending on supply levels for the iPhone X.

The price range from the very cheapest iPhone being sold to the most expensive model has obviously expanded significantly, from just $200 in 2010 to $800 once the iPhone X launches, with the iPhone SE dropping to $350. That reflects the broadening range of iPhones available, as well as the increasingly large storage tiers the various lines offer.

Remarkably strong ASPs throughout

But to my mind the most interesting thing to look at is what’s happened to ASPs, because the pattern in Apple’s other three big product lines – Mac, iPod, and iPad – has been that as the product has matured and Apple has spread the lineup down market, ASPs have fallen, sometimes very significantly. Mac ASPs in the late 1990s were well over $2000, but have dropped by around half in 20 years even ignoring inflation during that period. iPods sold for an average of over $400 when they first launched, but dropped to an ASP of near $150 in the ensuing ten year period, while iPad ASPs have dropped from over $600 to closer to $400.

The iPhone is therefore a massive outlier even among Apple’s own product lines, with an ASP that has held constant or risen for much of the last ten years. Apple has changed the way it reports iPhone revenues since its inception, which makes it impossible to make true comparisons between early ASPs and those today, but as the chart above shows, ASPs have risen over the last seven years at least even as the lowest available price has fallen by $200. In other words, though Apple has reduced the lowest price of iPhones by nearly half since its inception, people are choosing to spend more and not less over time, even as the market for iPhones has expanded dramatically beyond the US and other mature and high income markets. In other words, that expansion in ASP has happened in spite of many sales of cheaper, older phones in less wealthy markets around the world. The big question is therefore why, and what’s different about the iPhone?

Marketing, business models, and the centrality of the smartphone

I’d argue there are three key reasons for the behavior of iPhone ASPs. The first is marketing, the second is business and sales models for the iPhone, and the third is the increasing centrality of iPhones in our lives. Starting with marketing, I don’t think we can overlook Apple’s successful marketing of new iPhones each year as big improvements over the last year’s phones and especially over those from two years before, given that the two-year upgrade cycle was for many years the default. Apple has convinced people to buy a top of the line iPhone roughly every two to three years very consistently, and the reality is that the price of the top of the line iPhone has risen significantly during that period without much evidence of price elasticity in mature markets at least. That’s a testament to Apple’s product management, positioning, and promotion of its new devices.

Secondly, the business and sales model for selling smartphones in many markets is a huge factor here too. There’s really no other major consumer electronics category where the default sales model in many markets is to pay for it in monthly installments rather than upfront. There are certainly financing models in other markets, but nowhere is the installment or leasing model as ubiquitous as with smartphones. That model has helped the iPhone enormously, as one of the more expensive smartphones on the market, because consumers are not exposed as directly to the price increases they’ve faced over the years. Without the wireless carriers and their subsidy and installment models, I’m very skeptical the iPhone would have seen the iPhone performance it has.

Thirdly, the willingness of consumers to pay more and more for their iPhones is a testament to the increasing centrality of smartphones to our lives and the role these devices now play for us. In many cases, they’re partial or complete replacements for personal computers, used for managing calendars, writing emails, online shopping, paying bills, and so on. Many of us run businesses in part or entirely from our smartphones. And so these devices have taken on enormous significance for us and we’re willing to pay more to get bigger screens, faster processors, and other features which reflect their centrality in our lives.

My bet is that we’ll see significant demand for the iPhone X this year, and if Apple is able to meet that demand with significant supply later in 2017 and into 2018, ASPs could again rise quite significantly. That would be a testament to these same three factors: great marketing by Apple, the enabling business and sales models for smartphones, and a recognition by consumers that these are some of the most important devices in their lives.