Apple Inc.'s iPhone 7 Plus Is Driving Average Selling Prices Higher

By Ashraf Eassa Markets Fool.com

One metric that those who follow Apple (NASDAQ: AAPL) stock care about is the quarterly iPhone average selling price. Different investors care about certain metrics for many reasons, but here's what it tells me:

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  1. Apple's pricing power. The smartphone market is supremely competitive, with vendors routinely bringing new, high-end functionality to increasingly lower price points. The higher Apple's iPhone average selling prices are, the stronger Apple's competitive positioning in the smartphone market probably is.
  2. Apple's iPhone product mix. Apple, like any other smartphone company, sells a range of iPhone models at many different price points, the main difference between Apple and other vendors being that Apple's pricing floor is quite high. The higher Apple's average selling prices, the richer a product mix Apple is probably selling.

Of course, average selling price in a vacuum isn't helpful; after all, what good is a high average selling price if shipment volumes are low or declining substantially? Nevertheless, average selling price, in combination with unit shipment data, can tell us quite a lot about the health of Apple's iPhone business.

Image source: Apple.

Apple reported that, last quarter, it saw a 1% year-over-year decline in iPhone unit shipments, but that its total iPhone revenue was up 1% year over year for the quarter, which means Apple's iPhone average selling price went up year over year.

Let's go over what drove that average selling price increase.

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Looks like product mix

Over the last three iPhone generations, Apple has launched two variants of its iPhone models -- one with a 4.7-inch screen and one with a 5.5-inch display.

On an apples-to-apples basis, normalized for storage capacity, the 5.5-inch models carried a $100 premium during the iPhone 6 and 6s generations and a $120 premium in the current iPhone 7 generation. So to the extent that customers opt for iPhone 7 Plus devices over standard iPhone 7 devices, Apple should see an average selling price benefit.

That, unsurprisingly, is what Apple management says drove the average selling price boost last quarter.

"iPhone [average selling price] was $655, up from $642 a year ago, thanks to a strong mix of iPhone 7 Plus and in spite of unfavorable foreign exchange rates," Apple CFO Luca Maestri said.

Indeed, Apple CEO Tim Cook provided another interesting data point in regard to the mix of iPhone 7 and iPhone 7 Plus: "We sold the highest number of Plus models in the first half than ever before compared to 6s Plus or as compared to the 6 Plus." Presumably, in making this statement, he's referring specifically to the iPhone 7 Plus rather than the combination of iPhone 7 Plus and older iPhone 6s Plus models during the quarter.

Clearly, Apple did something right with the iPhone 7 Plus.

Extending this trick with OLED iPhone

If all goes as planned, Apple should release a premium iPhone with a full-face OLED display later this year. Given how strong customer response seemed to be to the iPhone 7 Plus -- which had the single "trick" of a dual-lens camera -- I suspect that Apple will be able to extend this average selling price growth with the OLED iPhone.

The new device is expected to not only be differentiated from the "standard" models through the display technology and form factor, but it's also expected to include 3D sensing technology, too, which -- if implemented well -- could be a fascinating selling point.

I expect the premium over the standard iPhone Plus model to be quite rich, but at the same time, the rumored features should allow Apple to easily command that premium while still enjoying substantial demand.

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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 a disclosure policy.