Does Apple’s dismal revenue generation trend to date with the iPhone XS and XR suggest that it needs to drastically rethink its luxurious iPhone pricing? Hold that thought, because there might be more time for that.
Although, it might be a good idea for Apple to stick with its original formula of selling “lesser priced” high-end phones, rather than changing things up all of a sudden like the way they did it this year.
Many of you might already be aware, Apple’s shares have fallen steeply from their early-October standpoint, thanks both to a tech correction and worries about lower than expected demand for its latest iPhones. The iPhone worries have been heightened by various sales warnings or guidance cuts from multiple Apple suppliers, including Cirrus Logic (CRUS) (gets over 2/3 of its revenue from Apple), Qorvo (QRVO), Lumentum (LITE), Japan Display and AMS, as well as reports of iPhone production halts.
Apple’s anxiety has also been heightened by the various measures the company has taken to boost iPhone XS and (especially) XR sales. These include increasing the trade-in offers that provides give back with older iPhone models, more aggressively promoting those trade-in offers at Apple’s physical and online stores and reportedly supporting iPhone XR discounts by overseas carriers via subsidies. Some believe that Apple got too aggressive with its iPhone pricing too early, and is now facing this situation. However, this explanation looms over the fact that the cheapest of Apple’s three new iPhones, the LCD-based, iPhone XR that — considering the production halt reports, the XR exposure of suppliers that have warned and Apple’s attempts to promote the device — appears to be missing more sales targets than its costlier siblings.
And between the 5.8-inch iPhone XS ($999 U.S. starting price) and XS Max ($1,099 starting price), it looks as if the XS Max has sold better. Analytics firm Mixpanel’s data indicates the XS Max accounted for 2.81% of the iPhone installed base as of Dec. 10, and the iPhone XS 2.26%. The XR ($749 starting price), which admittedly went on sale five weeks later than the XS and XS Max, only accounted for 1.66% of the base.
To cut to the chase, the cheapest of Apple’s new iPhones, a device with a starting price halfway between the ones the iPhone 8 and 8 Plus carried a year earlier when they were launched, seems to be having the hardest time living up to sales expectations. And the costliest of the phones, a device with an unprecedented starting price, seems to be faring the best relative to expectations. Arguably, Apple’s main mistake in this iPhone upgrade cycle wasn’t with its pricing per se, but its decision not to keep its last flagship iPhone (in this case, the iPhone X) around at a discount. Instead, it launched a brand-new iPhone (the iPhone XR) that features notable hardware compromises relative to both this year’s and last year’s flagship phones (an LCD display instead of an OLED display, only one rear camera, an aluminum case, and no 3D Touch support).
This is the kind of strategic decision that of course can be easily avoided with next year’s iPhone launches. Indeed, with The Wall Street Journal reporting that Apple has resumed producing the iPhone X, the company might not be waiting until next September to overhaul the low end of its high-end lineup, at least in some markets.
Meanwhile, the relatively healthy demand seen for the iPhone XS Max indicates that a flagship phone with premium pricing can still sell reasonably well if it delivers a major hardware improvement or two. There was clearly some pent-up demand for an iPhone X-type device with a larger display, and the XS Max addressed it.
With global smartphone sales clearly under pressure as upgrade cycles lengthen, it’s still fair to wonder how much iPhone unit growth Apple will see in years when it isn’t delivering major hardware changes.
However, that doesn’t mean the company needs to hit the panic button when it comes to iPhone pricing — particularly given that its profit growth strategy now increasingly revolves around growing average selling prices (ASPs), services revenue and sales of complementary hardware, rather than significantly growing iPhone volumes.