There’s been plenty of talk around the web and in financial circles about Apple’s announcements yesterday, but it seems like no one topic got more attention than the $200 price cut on the iPhone. While great news for most consumers (aside from the ones who purchased the 8GB for $599…), the financial community really took it to the Apple stock and brought shares down by over 5%. The overwhelming fear is that the iPhone, while receiving a ton of media coverage, isn’t selling as well as was expected. The thought is that the $200 savings will help spur sales.
While this is a plausible take (after all, when’s the last time Apple cut prices by 33% on a product only 2 months old?) I’d like to present another side of the story.
The iPod Touch, launched yesterday, is very much an iPhone minus the phone feature. There was two ways Apple could have gone about pricing the iPod Touch/iPhone combination.
- Keep the iPhone at the introductory prices, 4GB – $499, 8GB – $599. Then in order not to cannibalize sales of the iPhone, price the iPod Touch around those numbers, 8GB – $399-499, 16GB – $499-599.
- Price the iPod Touch at 8GB – $299, 16GB – $399, and drop the price of the iPhone as not to cannibalize iPhone sales.
Let’s analyze the first option. The iPhone was unique in its user interface and slick combination of phone, media player, and internet capabilities. At the time, there was no equal. For that reason, it commanded a premium, and being an Apple product, plenty of people were willing to shell out to buy it. However, strip out the phone features, and all you get is a fancy touchscreen iPod, limited by the capacities of NAND flash. Pricing the iPod Touch around iPhone levels was not viable for sales. Most people considering something in that price range would probably strong consider ponying up a bit extra for the iPhone. The iPod Touch would be DOA. The iPhone was already relatively expensive; an iPod at those prices would not sell.
Second option. The pricing for the iPod Touch becomes much more reasonable. Not only is it much more capable than the Nano, it also builds in web capability. For the 8GB version, going from $199 of the Nano to the $299 of the Touch is a significant feature upgrade, not to mention the ‘cool-factor’ upgrade. Now that the customer’s been upsold to the 8GB Touch, it becomes significantly easier to further upsell them to the 8GB iPhone. Apple is a master at reselling and part of that success stems from the fact that their low-end models are not separated from the higher end models by that much, financially. For a person looking at a $299 8GB iPod Touch, it is quite easy for them to look across and see an 8GB iPhone for only $100 more (well, there’s the issue of the AT&T contract, but that doesn’t add much to sticker shock). After all, another $100 gets you phone integration as well. $100 would only get you a half decent phone with most carriers anyways. In this manner, the people who want an iPod (at traditional iPod prices) can be pushed towards higher end products. At the same time, the potential iPhone buyer market balloons due to both upselling from iPods as well as increased interest from elsewhere due to lower prices.
Sure, part of the reason may be relatively lackluster sales of the iPhone, but it is relatively smart on Apple’s part to recognize that this can kill two birds with one stone. It becomes significantly easier to sell the high end Touch (compared to if they priced them inline with the old iPhone pricing) and the number of buyers of the iPhone will also increase. Perhaps we’ll see in a few months whether my theory is correct.