Research on High Pricing Smartphone

Abstract

Since the introduction of the iPhone X, we have seen more and more phones that are priced at about 1000,andsomeofthemarepricedatabout1000, and some of them are priced at about 2000. However, are these phones too expensive for most people? Many people do not want to buy these phones because, in some places around the world, people think these phones are too expensive. In addition, what benefits do the companies get when they price these phones this way? Thus, we can take Apple as an example. By evaluating the financial report from Apple, this paper aims to find out whether or not this kind of strategy is successful. Then, it suffices to show that by increasing the products' prices, the products' profits also increase. Thus, this strategy can be very successful since Apple has become the company with the highest market value. In addition, since the cost of production has increased dramatically, Apple needs high prices to keep the revenue stable. In some cases, these phones may not be overpriced.

Full text

Research on High Pricing Smartphone
Junqing Peng1,a,*
1College Liberal Art and Science, Arizona State University Tempe, Arizona, 85281, United States
a. jpeng41@asu.edu
*corresponding author
Abstract: Since the introduction of the iPhone X, we have seen more and more phones that
are priced at about $1000, and some of them are priced at about $2000. However, are these
phones too expensive for most people? Many people do not want to buy these phones
because, in some places around the world, people think these phones are too expensive. In
addition, what benefits do the companies get when they price these phones this way? Thus,
we can take Apple as an example. By evaluating the financial report from Apple, this paper
aims to find out whether or not this kind of strategy is successful. Then, it suffices to show
that by increasing the products' prices, the products' profits also increase. Thus, this strategy
can be very successful since Apple has become the company with the highest market value. In
addition, since the cost of production has increased dramatically, Apple needs high prices to
keep the revenue stable. In some cases, these phones may not be overpriced.
Keywords: smartphone, Apple, price, market value
1. Introduction
Today, many phones are priced over $1000. Some people just keep buying those. However, this price
is still too expensive for some people, so they cannot afford it. The reason why these companies raise
the price of their phones is that they need to spend more money to build these phones. For example,
the chips inside these phones are getting more expensive and these companies need to pay more to
develop a new phones. Thus, they need to raise the prices of phones so that they can make enough
money to keep their revenue stable. Indeed, these phones still could not be overpriced. For customers,
“Intrinsic values are based on people’s real psychological needs, support their growth and
development, and are inherently satisfying to pursue.” [1]. This paper takes Apple as an example
because iPhone is one of the most popular smartphones in the world and the profit of each iPhone is
the highest in the market. According to Daniel Ruby, iPhone has 18% market share in global
smartphone industry [2]. Based on this research, we can expect the price of the phone in the future and
what it means to our people. This means that in the future, more people could spend more money to
buy a phone. At the same time, we can evaluate Apple’s value in the market around the world and find
out what the advantages and disadvantages of high pricing are.
2. High Pricing - The Ultimate Strategy
One of the goals of a company is to maximize the revenue and minimize the cost. For a tech
company, it takes a lot of money to develop a new product each year. In addition, it also costs them a
lot to manufacture these products and sell them in different ways, including in retail stores and online
Proceedings of the 2023 International Conference on Management Research and Economic Development
DOI: 10.54254/2754-1169/18/20230098
© 2023 The Authors. This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0
(https://creativecommons.org/licenses/by/4.0/).
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stores. Thus, the company needs a lot of money to make everything as stable as possible so that they
have enough income and, at the same time, can keep introducing new products for people to buy.
Last month, Apple launched his 2022 Q4 financial statement. Notice that there is no sales volume on
the finical statement. Long time ago, Apple still shared the sales of their products. In the past, Apple
announced they would not share the sales because they wanted people to focus their revenue and
profits. Accordingly, they do not have to share the sales of each products. In that case, to get high
revenue, they need to increase the prices of their products, including the iPhone. For example, in
2017, Apple introduced iPhone X priced at $999, which was a significant increase in price and it let
them become a one trillion dollars company in 2018. Accordingly, the revenue and profit of the
iPhone had been increasing dramatically even though the cost of the production also increased.
Furthermore, they increased their other products, such as the iPad and Mac, to maximize revenue in
recent years.
Figure 1: The starting prices of the iPhone each year [3].
Based on the financial reports from the past five years, this kind of strategy has been very
successful for Apple. In the past twelve months, the net sales of their products and services were
$365,817 million, and the gross margin was $152,836 million. Thus, Apple earned a lot from their
products and services compared with other companies thanks to their high pricing strategy. However,
the cost of the sales also increased from $212,981 million to $223,546 million since the cost of
production is also rising around the world. For example, each chip in each new iPhone costs about
$50, so Apple has to raise the price of the phone in some countries. Finally, net income increased by
approximately $5,000 million dollars.[4] Furthermore, Apple has a significant amount of liabilities.
From the report, we can see that the total current liabilities have increased compared to last year.
Additionally, operating activity increased, but investing activity was lower than in 2021. Hence, this
year, Apple focuses more on operations. Thus, their high pricing strategy keeps their financial
situation optimistic since the cost is higher compared to last year. For Apple, a $1000 phone will keep
their income more stable in the current global financial situation.
In that case, however, the customer will spend more money to buy a phone. According to Dave2D,
who known as a YouTuber, in some country, people will spend 30% to 60% of their yearly income to
buy an iPhone. Thus, people will spend a lot money on their phone to get the best experience and
some people even can not afford an iPhone in some cases. It spends apple about $600 to make a
iPhone and Apple prices it at $999 to secure the profit per phone. Thus, to making more profits, Apple
can price higher even though the sales going down. They can do this because they still make the best
phone in the world in terms of overall experiences.
However, Apple knows some people can not afford some of their products. Thus, they still sells
less expensive iPhone, iPad, and Mac to earn as much as possible. “In offering a product line to
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achieve maximal profit, the manufacturer needs to carefully choose the variety of product
configurations and their prices given the products’ costs and customers’ willingness to pay.” [5].
These products use some old technologies so that they are less expensive to make. For example, the
new iPad does not feature a laminated display and it only support the first generation Apple Pencil
which introduced almost 8 years ago. In addition, Mac mini also did not get any design changes more
than a decade. These things reduce the manufacture cost dramatically. Moreover, “The goal of the
optimal PLD problem is the design of a number (line) of products (selection of the attribute levels for
each product in the line) that will optimize an objective of the company, usually profit, market share,
or customer welfare [6]. In that case, the profits still will be very high since these products are still not
very cheap.
Indeed, high pricing is the ultimate strategy. Apple is not the only company with premium pricing.
For example, Nike has the California collection, which has been priced really high. In addition, Tesla
has different models for their cars, including Model 3, Model X, and Model Y, where Model Y is the
most expensive one and Model 3 is the cheapest one. Moreover, Louis Vuitton is always one of the
companies with the highest priced products, and most people still buy these products because of the
brand. Because of their high pricing strategy, they can make more revenue and profits than other
competitive companies.
To make this possible, of cause the companies need to have a good product. Apple’s integration
between software and hardware is the best in the industry. iOS and macOS are the one of the most
advanced in the industry. They have unique sets of features and at same time they work seamlessly. In
addition, their products are powered by Apple silicon so that they have powerful features including
machine learning and computational photography and the developers can create same applications
which works with both platforms due to the same fundamental architecture so that the development
cost will be reduced dramatically. In that case, the customers can feel that the products they purchased
are worth since there is nothing like Apple’s products. Thus, a good product line is also the
foundation to make more money and the company can price them in the way they want to maximize
the revenue.
Accordingly, because of the inflation around world, this kind of strategy lets different companies
keep their revenue and at same time they can launch new products every single year during this
period. For some customers, they do no care about the prices because they just want the best
technologies and products. However, they are too expensive for some customers so that these
customers just choose cheaper products or stop buying new products.
3. Conclusion
All in all, from some perspectives, $1000 phones are not overpriced. It sets a foundation for the
companies to have enough money in the current situation, and at the same time, the companies can
still offer new products each year for the customers. However, this kind of strategy is not for
customers who do not have enough money to buy new products. In general, this kind of strategy will
help the companies go through the inflation and, at the same time, still offer new products each year.
Companies like Apple offer the most advanced products in the industry, and there is no other
company that offers this combination of design and utility. In that case, they can price the products as
high as they want because they know that some people will still buy them.
In addition, the global economy is recovering, and more people can afford these products. Apple is
a smart company, and they know what they are doing. More importantly, people need to think about
what they can do with these products. If they can earn more and more by using these products, that
means these products are not expensive. Thus, people need to consider the value of the products to
them. In that case, people can build a better world for us to live in. However, the data in the article is
Proceedings of the 2023 International Conference on Management Research and Economic Development
DOI: 10.54254/2754-1169/18/20230098
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limited, and Apple cannot represent the whole industry since there are a lot of phone companies in the
world. Thus, we should look at other options so that the conclusion can be more convincing.
Acknowledgment
I am so thankful to Prof. Colleen Honigsberg. She taught me a lot of ideas about finance and how to
analyze financial reports. In addition, I also really thankful to the teaching assistance who spent time
explaining the concepts for me. I really grateful to the teacher who provided some helpful feedback to
my essay. In the end, I appreciate the supports from my family for me and they let me make today
possible.
References
[1] Kasser, T. (2006). The high price of materialism. MIT Press. Cambridge, MA
[2] Daniel Ruby, 2022, 26+ iPhone User & Sales Statistics (Fresh Data 2022), https://www.demandsage.com/
iphone-user-statistics/
[3] Marques Brownlee, 2022, Reviewing EVERY iPhone Ever! https://www.youtube.com/watch?v=8FpPSMIB4u
A&t=616s
[4] Apple Inc. 2022, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited),
https://www.apple.com/newsroom/2022/01/apple-reports-first-quarter-results/
[5] Fruchter, G. E., Fligler, A., & Winer, R. S. (2006). Optimal product line design: Genetic algorithm approach to
mitigate cannibalization. Journal of Optimization Theory and Applications, pp. 227–244
[6] Pantourakis, M., Tsafarakis, S., Zervoudakis, K., Altsitsiadis, E., Andronikidis, A., & Ntamadaki, V. (2022).
Clonal selection algorithms for Optimal Product Line Design: A comparative study. European Journal of
Operational Research, pp.585-595
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