In a recent report, DigiTimes claimed that pre-orders for Apple‘s (NASDAQ: AAPL) latest iPhone X smartphone was falling short of expectations in some regions, such as the U.S., Singapore, and Taiwan.
Thanks to the “weak performance” of the iPhone X, DigiTimes says, Apple is reportedly prepping three new smartphones for 2018 — two with advanced organic light emitting diode (OLED) displays, just as this year’s has, and one with a liquid crystal display (LCD).
Considering these models have been rumored for quite some time, I’m skeptical to believe DigiTimes’ sources when they claim that next year’s models will be a direct reaction to “weak performance” of the iPhone X.
In addition — and this is the most interesting bit — DigiTimes said Apple is “rumored to adjust its pricing for iPhone devices in early 2018.”
Let’s go over why Apple might do that and what it could mean for Apple’s iPhone business.
The impact of price cuts
The reason companies cut prices is simple — they want to boost demand. However, it’s important for investors to understand that iPhone revenue is a function of two factors: iPhone unit shipments and iPhone average selling prices.
If Apple is thinking about cutting iPhone pricing, then the company probably thinks it can grow iPhone unit shipments by enough to more than exceed to loss of revenue, as well as per-unit gross profit margin, from the price reduction.
This seems like a reasonable strategy: Apple introduced its new iPhones earlier this year and captured the significant early demand that there often is for the company’s new devices.
However, as the competitive environment intensifies from competitor product launches and customers recognize that Apple’s next generation of iPhones continues to creep closer, demand for Apple’s latest phones — especially at full price — is naturally set to wane.
By cutting prices, Apple may hope to stimulate demand for its devices and, in doing so, maximize the amount of revenue and profit it generates from these devices over the product cycle.
Now, figuring out by just how much to cut prices, if Apple decides to do it at all, is not trivial. If Apple cuts prices by some percentage, it has to have a reasonable degree of confidence that total unit shipments will grow by greater than that percentage.
Too small of a price cut, and Apple risks simply seeing a minimal increase in demand while it loses a significant amount of revenue and, importantly, profit. Too large a price cut, and Apple might see significant unit shipment and possibly even revenue growth, but it could so dramatically eat into its profit margin that it’d have been better for Apple to not cut prices at all.
The point is that a lot of thought is going to need to go into any potential price reductions.
The 2018 product strategy
If demand for Apple’s iPhones during this cycle turns out to be weaker than Apple had hoped, I’d be inclined to think that a price adjustment is more likely in the next generation of devices rather than a mid-generation cut.
For example, the direct successor to the iPhone X could come in at a lower price point than the one the iPhone X did. Apple could try to offset that lower entry price point by introducing more or larger storage options at the high end of the stack.
Apple is also expected to be preparing a larger-size version of the iPhone X successor next year. That device could come in at a higher price point than this year’s iPhone X did, which could give Apple some wiggle room to reduce the pricing of the direct successor to the iPhone X while maintaining overall iPhone average selling prices.
Apple has a lot of options with respect to the pricing of next year’s iPhones to choose from, and I can’t wait to see how Apple sets the pricing of its 2018 iPhones.
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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.
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