iPhone margins

In a previous post, I reacted to the argument by some that the iPhone price margins (at 53%) were too high. Now, only two and a half months after launch, there has been a massive drop in the iPhone price with the 8GB model falling from $599 to $399 (a 30 percent price cut). At these crazy prices, surely they will walk out the door.

The implied margin (based on a $280.83 unit cost) is now 29%. This translates into an imputed price elasticity for the iPhone of 3.37. That means that for every one percent fall in price, Apple expects to increase its sales by 3 percent.

Now all this seems related to the new iPod touch; tape it to a mobile phone and you pretty much have an iPhone. The 8GB model is $299; $100 less than the iPhone now is. That means that the value of the ‘phone’ part to a typical customer is about $100; not too different from the price of a separate mobile phone. But Apple is likely getting more than that as it probably receives a share of AT&T call revenues and I can’t imagine AT&T would have been happy with a low priced, almost substitute, coming out without a corresponding price drop on the iPhone. Anyhow, the delayed price drop has net Apple at least another cool $200m from leader adopters. Not too shabby for the shareholder value thing.

4 thoughts on “iPhone margins”

  1. Maybe this was simple price discrimination on Apple’s part. An easy way to identify those with a high willingness to pay for new technology is jack the price up and leave it there for a few months, then lower it later.

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  2. In his blog, Steve Jobs explains the full rationale behind this move.

    “We baited you in with a high price (the one thing no Apple fanboy can resist) and sure enough you fell for it just like we knew you would.” more

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  3. Hi

    I was very interested in your article, especially, in the elasticity of demand figures. Could you maybe send me a mail showing exactly how you got to an elasticity of 3.37. That would be very helpful. Thank you very much.

    Regards

    Karl

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