Later this year, Apple (NASDAQ: AAPL) is expected to launch three new smartphones. The midprice model is expected to be a direct successor to the current iPhone X, while the most expensive model is expected to be a larger version of the next-generation iPhone X, which I'll refer to as the iPhone X Plus.
There has been quite a lot of speculation as to how Apple will price the new models. As a refresher, Apple's current iPhone X starts at $999, while the lower-end iPhone 8 and iPhone 8 Plus start at $699 and $799, respectively. The iPhone X's high price tag is widely believed to be one of the reasons that demand for the device is seemingly falling short of both Apple's and analysts' expectations.
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Some think that Apple could price the successor to the iPhone X at $999 and then introduce the iPhone X Plus at a higher price point -- say, $1,099. Others, like analysts with RBC Capital, think that Apple could start the next-generation iPhone X at $899 and the iPhone X Plus at $999.
The reasoning behind that is the "limited success iPhone X had with $1000+ [average selling price]."
Let's explore whether such pricing would make sense.
Lower price, higher sales
If Apple were to lower the price of the next-generation iPhone X to $899 from $999 for the current model, then it would, by definition, dramatically increase the value proposition of the next-generation iPhone X relative to the current one. It'd be a better phone at a lower price.
That lower price could help Apple sell more devices and if the increase in units more than offsets the decline in average selling price, Apple comes out ahead in terms of revenue.
Moreover, a recent report from DIGITIMES claims that Apple has managed to reduce the cost to manufacture the next-generation iPhone X by 10% compared to the manufacturing costs of the current iPhone X (that comparison is likely apples-to-apples, as devices become less expensive to manufacture over the course of their production run).
If Apple has managed to significantly cut costs as DIGITIMES says, then Apple could offer the next-generation iPhone X at $899, enjoying the increased sales that result from the price cut while also generating similar levels of margin dollars. In fact, the reduced starting price could be offset by Apple introducing a 512 GB storage option at the top of the product stack.
iPhone X Plus at $999
I also like the idea of Apple continuing to offer something at the $999-plus price points, so an iPhone X Plus that starts there seems reasonable. In fact, I think such a device would fare better at that price point than today's iPhone X did because it'll be a true next-generation "Plus" model (models that are increasingly appealing to smartphone users and particularly smartphone enthusiasts), with unique software features that the iPhone X won't have.
Moreover, a hypothetical iPhone X Plus at $999 simply represents a better perceived value than a smaller iPhone X at the same price point due to the larger screen.
Ultimately, I wouldn't be surprised to see Apple follow the pricing strategy that the analyst predicts here, particularly as it would effectively allow Apple to have its cake and eat it, too, by bringing a next-generation iPhone X to a lower price point (helping to boost iPhone unit shipments) while still having something cool to offer at the $999 price point (helping to maintain high average selling prices).
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.