Let’s look at a couple of facts, one confirmed by Apple, the other suggested in a recent survey, which indicates that price cuts will do wonders to the company’s revenue prospects. In the first case, there’s the iPhone SE. The price starts at $50 less than its predecessor, the iPhone 5s. But it contains most of the parts of the high-end iPhone 6s, and has been back-ordered since being released at the end of March.
According to Tim Cook, during the quarterly conference call with financial analysts, Apple misjudged expected demand. So far so good, but was it the lower price that fueled more sales, or the fact that there was pent-up demand for an up-to-date iPhone with a smaller display? Perhaps it was a combination of both.
Now in a survey conducted by Slice Intelligence, a firm that didn’t really exist as a public presence until the Apple Watch arrived last year, sales of the device soared in April. Why? Because the base price was reduced by $50 for entry-level models. So the 38-millimeter model went from $349 to $299.
As a practical matter, $50 doesn’t seem to be an awful lot for a product that tops out, with the very fanciest watchband, at $17,000 or so. But the watches you buy in two sizes at the highest prices have the very same components as the cheapest models. So you can see where the volume is. So Slice Intelligence reports that sales soared by 250% as the result of that small price cut.
Is this true?
Well, the copying machines that pass for journalists these days are taking that information at face value, that it didn’t take much to make Apple Watch sales soar. Perhaps, but it’s not that Slice Intelligence has a solid track record for delivering dependable numbers about anything. According to the company’s site, the actual online purchases of people who participate in their surveys are tallied, so they claim higher accuracy.
A statement at the company’s site explains, “Slice Intelligence data comes from several sources, including the receipts in the e-mail inboxes of consumers who use the popular Slice online shopping service, Slice, and through strategic partners, including users of Slice’s API platform. Each e-mailed receipt contains a treasure trove of data, all of which Slice extracts, parses and measures, using our proprietary Merchant Template Management (MTM) technology.”
I’m not at all clear how this all adds up to data that represents an accurate cross-section of the public, however. I suppose other surveys will present a clearer picture of how Apple Watch sales are faring going forward.
Understand that Apple doesn’t report Apple Watch sales. Instead, the estimates are based on the “Other” category in Apple’s financials, so there’s some level of guesswork in how sales are allocated to different product and service categories.
So where does that leave us?
Well, I suppose the price cut had some impact simply by making the process of buying an Apple Watch a little less daunting. But someone still has to be interested in wearables, and that may be a stretch. The level of demand has yet to be proven beyond a few million per month. But it’s early in the game, and perhaps future versions will, with built-in cellular radios and some killer apps, become more compelling to customers.
This isn’t the first time Apple has cut prices. Two years ago, the price of the cheapest MacBook Air was reduced by $100 to $899. Did it boost sales, or stop a further erosion? Without access to Apple’s marketing data — something outsiders won’t get, it’s hard to know. But Macs occupy the highest tiers of PC pricing, so even a little bit had to help. Overall, the prices of most Macs are lower than they used to be. With a double-digit reduction in sales for the March quarter, I suppose Apple might consider cutting prices yet again if it doesn’t seriously hurt margins.
But what about the iPhone? Does the iPhone SE herald a trend? Will the iPhone 7 also see a price drop? And is Apple willing to tolerate lower profit margins to boost sales and potential revenue? If so, to what degree?
Don’t forget that Wall Street is already down on the company’s prospects. Even though other smartphone makers, except for Samsung, report little or no profit on mobile handsets, that doesn’t mean that the financial sector is going to tolerate a significant change in Apple’s margins. It’s certainly clear the company won’t join the race to the bottom, so it’s a matter of how sales might increase in exchange for modest price cuts.
This is the sort of dilemma that will no doubt keep marketers and corporate bean counters up at night. True, higher sales volumes will lower the cost of components some, but what’s the sweet spot? Or has it reached a point where, except in underdeveloped countries, the smartphone market is saturated and boosting sales will become more and more difficult regardless of price?
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