What Apple Inc. CEO Tim Cook Means By Charging a "Fair Price" for Its Products

By Markets Fool.com

On Apple's (NASDAQ: AAPL) most recent earnings call, one analyst observed that even in the face of a $20 generation-over-generation increase in price for the iPhone 7 Plus relative to the prior-generation iPhone 6S Plus, the former is "completely sold out."

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Image source: Apple.

This led the analyst to ask Apple CEO Tim Cook the following question:

As you see more and more features being added into iPhones, do you conceptually expect that you are anywhere close to the point where raising ASPs [average selling prices] further would be net disruptive to demand? Or do you see more room to raise ASPs over time as you add incremental features?

Cook answered:

With the iPhone 7 Plus, we put an incredible amount of innovation into the camera and the overall photo experience, and customers are obviously using that and have discovered that they love it. And so, we're getting an incredible amount of feedback there. We also get incredible feedback on the iPhone 7. And, but the mix that we projected on iPhone 7 Plus is short of what the reality is and so we are chasing supply there. In terms of the ASP, the way we think about it is we want to charge a fair price and so we don't want to charge more than that, and we think it's worth being fair.

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Based on the commentary from Cook around Apple wanting to "charge a fair price" for its products, including its iPhone products, it might seem as though he's saying that the company is going to try to keep its iPhone average selling prices relatively flat going forward.

If you read between the lines a little bit, though, that's likely not the message he intended to convey.

What is Cook saying?

To understand what Cook is trying to convey here, it's important to understand what a "fair price" means in this context.

"Fair" doesn't mean, "We'll cram in way more features than we did last year, balloon our cost structure, and then sell you the device for the same price that we sold last year's model." That wouldn't be "fair" because Apple winds up selling something that's much more expensive to manufacture while not getting paid for that innovation.

On the flip side, if Apple were to build a successor to the iPhone 7 Plus next year -- let's call it the iPhone 8 Plus -- and it didn't add any significant new features (aside from the generally expected improvements in processor and wireless connectivity speeds) and cost about the same to build, it wouldn't be "fair" for Apple to jack up prices generation-over-generation, either, since the value just wouldn't be there.

The way to think about a "fair price" is this: If Apple delivers a significant step up in relative value compared to what it delivered with prior-generation products (such steps up are often accompanied by commensurate increases in manufacturing/component costs), then it's OK for the company to charge more.

If it doesn't deliver such features in a next-generation product, then a "fair" price would likely be what the company charged last time.

What does this mean for future Apple products?

Going forward, I suspect that Apple will more aggressively segment its product line, particularly with its iPhone product line (especially considering a recent Nikkei report claiming that Apple is planning three iPhone models next year, including a "premium" variant).

Indeed, I expect Apple to continue to deliver solid improvements at the typical iPhone price points, but it also stands to reason that the company will experiment with bringing more feature-packed devices to even higher-end price points.

Additionally, earlier this year Apple introduced the relatively low-cost 4-inch iPhone SE aimed at more budget buyers. I don't expect Apple to be as aggressive in building products for lower price points, especially as being too aggressive there could lead Apple to participate in a painful race to the bottom, but putting out products like the iPhone SE from time to time is probably a smart move.

At the end of the day, Apple's job is to make sure to deliver great products that encourage smartphone buyers to choose its devices and, if possible, choose the higher-priced models in its portfolio. Apple's seemingly done a good job here with the iPhone 7 Plus, and it'll be interesting to see if the company can build upon this strategy in the product cycles ahead.

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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.