Why Doesn't Apple Discount iPhone To Increase Sales? The Following Calculation Shows That Things Are Not As Simple As You Think

That is the analysis from Gerardo A Dada, a marketing expert with over 20 years of experience in the field. It is worth noting that the $3 billion in the operating costs for Apple's iPhone division is just a guess, but it is still good enough for illustration purposes as the main purpose of this calculation is to illustrate a point.

Dada begins with an assumption based on Apple's Q4 / 2018 business report. During that time, 47 million iPhone devices were sold with an average retail price of $ 1,000. With the 21.3% average channel margin, average revenue Apple from an iPhone is approx $787. Including $453 of components cost, $100 cost of production, packaging, shipping, etc, Dada estimates the total input cost is about $550 which means the profit Apple can earn on each iPhone is $237, equivalent to 23% of the retail price. The gross margin will be 30%, an impressive figure in the phone manufacturing industry.

Using this data, assuming Apple lowered the price of the iPhone by 10%, their profit would be reduced by 45%. Similarly, if the discount is 20%, the profit level will be dropped by more than 90%.

Agree that if the price drops, Apple will likely sell more iPhone devices, but no one really knows for sure how much more. That is the ratio of demand/selling price, which is the concept of "price elasticity of demand" that manufacturers must consider the pricing of their products before launching them to the market. Often the demand will increase when the selling price is lower, but it is not a linear relationship as the need will only rise to a certain level and stop.

Assuming a 10% discount for iPhone will get Apple 15% more buyers in return, sounds like a good result? Absolutely not. In that case, the company's profits will decrease by about 32%.

Yes, you can think that 10% discount is still nothing. Apple needs to be more aggressive and reduce the price to 20% for example. At that time, the average price of each iPhone will be dropped from $1,000 to $800 (still very high in the smartphone market). At this price, it is assumed that Apple has 45% more iPhone buyers, meaning they will sell more than 84 million iPhone units every quarter. Even if Apple can manage to find an extra 84 million buyers, their profit will still drop by 70%.

In short, if Apple drops the price of the iPhone by 10%, they will have to achieve 1.5 times higher sales than the current one to ensure that they maintain the profitability they have today. If discounted by 20%, sales would have to increase by three times to keep the same profit.