Understanding Apple Inc.s iPhone SE Pricing Strategy

By Markets Fool.com

The iPhone SE. Image credit: Apple.

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I have to admit, when Apple announced the price points of its new iPhone SE lineup, I was a little bit shocked. The device, which is practically -- save for a few minor items -- an iPhone 6s on the inside and an iPhone 5s on the outside, is priced at just $399 for the model with 16 gigabytes of storage and $499 for a version with a full 64 gigabytes of storage.

In my mind, this phone has virtually destroyed the value propositions offered by the iPhone 6 and 6 Plus, which start at $550 and $650 for models with 16 gigabytes of storage, respectively.

Although the move is risky, I believe that there is real method to Apple's apparent madness here. Let's take a closer look at it.

The current choices
The idea of a $399/$499 iPhone with flagship internal specifications is certainly going to be appealing to many. That said, for all of the features and computing power that the iPhone SE brings to the table, there will be those who simply must have larger-screen smartphones.

Before the iPhone SE arrived, those customers could choose between the 2014 iPhone 6/6 Plus models or the newer iPhone 6s/6s Plus, and doing so seemed like a sensible way to save a few bucks. After all, if somebody just wanted a larger iPhone but didn't want to pay extra for the better internal specifications, there was no shame in getting the iPhone 6/6 Plus.

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However, with the iPhone SE sitting there at $399/$499, packing substantially better specifications in virtually every relevant area, a customer who doesn't want a smaller-screen device might feel a little bit silly paying more for larger, but generally inferior, devices.

The "solution" to this customer's dilemma would be to buy either the iPhone 6s or the iPhone 6s Plus. Sure, they're more expensive than their iPhone 6/6 Plus counterparts, but they come with the best of the iPhone SE, the best of the iPhone 6, as well as several significant additions on top.

In other words, theperceivedvalue proposition of the higher-end iPhone 6s/6s Plus phones relative to the iPhone 6/6 Plus may have actually increased as a result of the introduction of the iPhone SE.

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Beyond the next six months
The iPhone SE is only really a potential "problem" for the middle-tier of Apple's smartphones for, say, the next six months or so. Once the iPhone 7-series phones launch, the iPhone 6/6 Plus will likely be retired in mature markets (though potentially kept around for price-sensitive emerging markets).

This means that Apple's stack will look far more "natural" by that time. iPhone SE at $399/$499, with the iPhone 6s/6s Plus picking up where the SE leaves off at $549/$649. The iPhone 7-series phones would then occupy the traditional high-end price points.

I suspect that the iPhone SE will not see an update next fall as the iPhone SE really does perfectly fit the notion of a price-reduced-but-still-awesome variant of the iPhone 6s.

My expectation is that the next 4-inch iPhone -- should the iPhone SE do well enough in the marketplace to warrant a refresh -- will come in the spring of 2018, presumably following the launch of the iPhone 7s. It will be interesting to see what specifications Apple would bring to such a device at that time, should it materialize.

The article Understanding Apple Inc.s iPhone SE Pricing Strategy originally appeared on Fool.com.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.