Why iPhones are costly? Pricing of phones explained - YouTube

2020 has become a weird year when a brand like Oneplus which was aimed at enthusiasts is selling their products at twice the cost of the latest device from Apple a premium brand.

For reference, even the origin live phone that was launched in 2007 was priced more than the just released iPhone SE 2 at $499 even without adjusting for inflation.

And obviously, it got quite a few reactions!

Let's understand why Apple has now taken the nosedive and released the iPhone SE at $399 in 2020, with the pricing strategies that most smartphone manufacturers follow.

Pricing strategy involves setting the initial price and then providing a plan for changes in price in the future.

Basically, pricing depends on three major factors.

The cost of raw materials and services involved in making the product,

the miscellaneous costs which includes sales tax import and export duties and so on

and finally, the profit that the manufacturing take.

Based on these three factors, there are three major strategies that smartphone manufacturers generally follow.

Price skimming is a strategy followed by premium brands where the products are priced very high with higher profits so that fewer sales are needed to break-even for the manufacturer.

Since 2007, iPhones and in general, all smartphones have become increasingly costly,

but given the versatility that phones have achieved in that period, it is not an exaggeration to say that the rise in price was expected.

The most premium iPhones have a price range from $1200 or Rs 92000 and $1400 or around Rs 110,000.

And that is if you are lucky enough to live in the USA.

The prices of iPhones in all the other parts of the world are much higher compared to that of USA

with the highest-end model priced at around $1,900 here in India.

Since 2017, Apple releases three iPhones every year for creating the decoy effect to push the sales of the costliest models.

The decoy effect is a phenomenon where the consumers will tend to have a change in preference between two options

when presented with a third option that is asymmetrically dominated!

Confused right? Let's understand with an example.

Consider that you are in a movie theater and the theater sells you two options for buying popcorn buckets.

A small bucket for $4 and a large bucket for $8.

Most of us tend to spend less and hence we go for the cheaper option.

But if the theater wants to increase the sales of the larger bucket, what do you think that they can do?

Give a discount on the larger bucket?

No, no, no!

Who wants to give a discount when they take a hit in profits right?

There's a much better strategy than that.

The better method would be to give a third option of a medium bucket at $7.50.

This is called the decoy pricing and is a a proven method for tricking our minds

into comparing the cost here buckets and eventually buying the larger bucket thinking that that is more value for the money.

In 2019, the iPhones used this effect where the iPhone Levin was priced at $649,

while the iPhone 11 Pro was priced at $999 and the iPhone 11 Pro Max at $1099.

Here, the iPhone 11 Pro was acting as the decoy.

Now let's assume that the medium bucket was priced at $4 and 50 cents rather than $7 and 50 cents.

Here, the small bucket would act as the decoy for the medium one.

This strategy was followed by Apple in 2017 where they were pushing

the sales of the iPhone 8 Plus and the iPhone X being the limited edition model.

It was even followed by the 2020 Galaxy S20 models.

Today phones not just status symbols but are essential tools

and this created a vacuum where companies like Oneplus and Xiaomi emerged who followed the penetration pricing.

This strategy is followed by very new companies or companies that don't have a brand reputation

where the products are initiated priced at very low prices to initiate the word of mouth.

In this case, the cost of the products and other prices remain more or less the same

but the profit margin is kept extremely low expecting that customers will switch to the new brand because of the lower price.

In 2014, Oneplus launched their one plus one which was priced around Rs 22,000 rupees

when phones with similar specs like the Galaxy S6 were being sold at Rs 50,000 rupees.

But companies using penetration pricing generally increased the prices of their products as time goes by.

You can see that the prices of Oneplus flagships have increased from $299 in 2014 to $699 for the cheapest model in 2020.

This is partially due to the increased cost of production as we discussed earlier but is also partly due to the increased profits.

As the cost of these mass phones have gone up so has the average time taken for a person to upgrade their phone.

This would mean that it is increasingly becoming difficult for manufacturers to sell their flagships.

This is because today, the iPhone has much more competition.

Not from Samsung, not from Huawei, but from the iPhone itself.

When the iPhone releases the iPhone 11 Pro,

it is very similar to the previous model and for an average customer, it doesn't make a difference.

This methodology in most researching the market and pricing the products according to the similar products existing in the market.

Now, when a big company like Apple does this it is also called 'predatory pricing'.

This involves eliminating the products in a similar price range with superior quality products or with its brand value.

For achieving this, big companies like Apple can afford to take zero profit or even take negative profit for a considerable amount of time.

Apple has taken this approach a couple of times in the past five years

but they have never priced a brand new iPhone for less than $500.

This is because pricing any product to low may put off customers from buying it thinking that it is an inferior product.

But the iPhone SE 2 is pretty different here and there are four major reasons why this iPhone can be a giant success.

The iPhone XR and iPhone 11 were the largest selling phones in the past couple of years

and the iPhone se 2 is priced almost $300 cheaper than those two.

People always know that Apple never compromises on the quality by lowering the price.

So considering the trend it is reasonable to assume that iPhone SE will definitely be as successful as the iPhone XR and the 11 if not more successful!

With the economy slumping due to the ongoing coronavirus pandemic

and people being more sensitive about their spending behaviors,

Apple has named the pricing with this product.

Even outside the USA, in countries like India the iPhone SE 2 costs Rs 42,500, which is around $560.

This is 160 dollars costlier than the American pricing

but comparing that with the iPhone 11 throw which costs around $350 more and the iPhone 11 Pro Max which costs around $500 more,

I would still call the iPhone SE's pricing not fair, but we are paying the least Apple tax here.

This is also true for many other countries.

We can definitely call this phone value for money because Apple has put the internals of a $1000 phone at a $400 price range.

No other phone at this price range would have wireless charging waterproofing and the fastest processor in the planet.

Sure, the design is a bit outdated but most people don't care.

And people might even love the older design because it doesn't have a notch

and it also includes the touch ID which can be useful in the period of the pandemic where we are using masks.

As smartphones get bigger recently, a compact phone with flagship internals is a pretty good deal for a lot of people.

That is particularly true when it happens to be an iPhone

because smaller phones usually have shorter battery life but not the iPhone