Image source: Apple.
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On Sept. 7, smartphone giant Apple (NASDAQ: AAPL) announced its next-generation iPhones, known as the iPhone 7 and iPhone 7 Plus, respectively. The new phones represent a solid step forward for the iPhone series, delivering enhanced performance and features as well as a more refined aesthetic.
The iPhone 7 series phones come in three storage tiers, with the cheapest variant -- a version with 32 GB of flash memory -- starting at $649. From there, it costs $100 to move up each tier. This is the same pricing structure that Apple has employed with its iPhones for quite a while now.
The iPhone 7 Plus, however, begins at $769 for the base model with 32 GB of storage and, like the smaller iPhone 7 series, costs buyers an additional $100 per storage tier. This represents a slight premium over what the iDevice maker had charged for previous large iPhone models.
What does this mean for Apple? Let's take a closer look.
$20 isn't likely to impede demand
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It doesn't seem as though the additional $20 is going to impact demand all that much. Relative to the pricing of prior-generation base models, this is less than a 2.7% price hike. For the higher-end models the price increase is an even smaller increase, with the price hike working out to just over 2.1% for the highest-tier version.
Additionally, a 2%-3% price hike, particularly given the scope of the hardware improvements and the bump in storage across all of the tiers (16 GB/64 GB/128 GB has now become 32 GB/128 GB/256 GB), can be very easily justified.
So, I don't think that the slight price increase will have anymeaningful negative impact on demand.
Why charge the extra $20, though?
If the iPhone 6s/6s Plus cycle had driven continued growth the iDevice maker, it would be tempting to chalk up the price hike to Apple simply wanting to improve gross profit margins and ultimately wring out additional profitability from these new, higher-end phones.
However, in light of the fact that the older iPhone 6s/6s Plus didn't do that well, I doubt that Apple would do anything to risk unit demand (although, as I explained above, I don't think the risk is particularly great).
Instead, Apple likely increased the pricing in an attempt to maintain gross profit margins generation over generation. Both the iPhone 7 and iPhone 7 Plus improved generation over generation, but the larger iPhone 7 Plus arguably saw a more dramatic improvement.
In particular, the iPhone 7 Plus features a dual lens camera (whereas the iPhone 6s and 6s Plus shared the same lens count), and it also features 50% more system memory (whereas the iPhone 6s and 6s Plus had the same amount of memory).
That extra $20 likely serves to simply offset those increased bill-of-materials costs.
A smart strategy
At the end of the day, I strongly suspect that high-end smartphone buyers want additional, innovative new features. Moreover, it seems likely that they are fairly willing to pay a premium for those improvements. In that context, a $20 premium just doesn't seem like a whole lot, and Apple's strategy here seems sound, although we'll have to see how the new phone does in the marketplace before we'll know for sure.
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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on 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.