Why drop the price of the iPhone?

There are a few theories about why Apple has dropped the price of the iPhone floating around the web.

a) Because Apple wasn’t selling enough iPhones at the higher price (except it sold almost 1 million of them…)
b) Because Apple thinks dropping the price will mean it sells more phones this Christmas (this is Apple’s official line)
c) Because if it was $200 more expensive than the iPod touch many potential iPhone customers would just settle for the iPod touch (well, I would)
d) Because Apple knew that there would be excited early-adopters prepared to pay the higher price (and there were, almost 1 million of them)

It’s hard to know which of the above reasons is correct. Or indeed if any of them are. I’ve got another theory though:

e) Because in order to sell the iPhone to customers in the UK (and maybe Europe) Apple was going to have to drop the price of the phone. And if it was to do that then the US customers would be up in arms - or coming here to do their Christmas shopping – I mean Holiday shopping…

In a few weeks we will see what deal Apple has managed to do with a UK network, probably O2 (at least at first – I reckon there will be more networks with the iPhone here by the end of next year).

The UK networks offer heavily subsidised phones to UK customers - often swallowing the entire cost of the handset. I shouldn’t think O2 were too keen on swallowing the cost of a £300 product. £200 seems a little easier to swallow.

For example, the HTC Touch handset is available on Orange, through the Carphonewarehouse for free. Users pay £35 a month for 18 months and get 500 minutes and unlimited texts every month…

If Apple wants the iPhone to be popular in the UK, the price has to match the market here. Maybe the price drop is setting the way for that.

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Comments received

AlanAudio said on Monday, 10 September 2007

The pre-Christmas period is a critical period for sales, they are likely to be considerably higher than at any other time of the year.

If Apple wants to sell a huge number of iPhones in the run-up to Christmas, the price must be dropped now, otherwise there won't be another opportunity like that for another year, by which time competing products and services will have been developed.

By dropping the price to such an aggressively low point, Apple is going for the jugular. It's very hard to see how any rival product can hope to make inroads against the iPhone when there are so many patents protecting it and such a low price point.

I suspect that dropping the price has been in the pipeline for some time and could be the 'product transition' that was going to affect Apple's short term profitability this quarter. However such losses will be handsomely outweighed by continuing shares of the cellphone revenue.

karenhaslam said on Tuesday, 11 September 2007

Another reason why Apple may have dropped the price is outlined in this story (link below). It's normal practice in the mobile phone market to drop prices regularly (much more so than in consumer electronics)... Two months still seems a bit quick though.

www.macworld.co.uk/ipod-itunes/news/index.cfm?newsid=19052

AlanAudio said on Tuesday, 11 September 2007

I still think it's mostly to do with the holiday buying season. Apple only gets the one shot at it, so that had no choice but to go for it this year, or leave it for another 12 months.

There are many possible explanations, some quite plausible, but the Christmas one seems to tick more boxes than the others and could have been planned well ahead of time.

Launching at a higher price helped to manage demand.If it had been launched at the lower price, supplies would have been limited and it would be portrayed as a fiasco. Presumably production is going well and they can now supply them in vast quantities. Let's hope that AT&T can keep up.

karenhaslam said on Thursday, 13 September 2007

If it is just about selling more iPhones, why not sell the iPhone at $399 from the start though? Why drop the price after 2 months just to sell more in the run up to Christmas?

AlanAudio said on Sunday, 16 September 2007

As I had already said in my previous posting, launching at the higher price helped to manage demand during the launch period.

If it was initially put on sale at $399, there would have been overwhelming demand for it and there would have been a risk that demand greatly outstripped supply, or AT&T's ability to connect them. Either situation would attract undesirable publicity.

As it happens, AT&T struggled to keep up, so it's as well that initial sales were a bit slower than they might otherwise have been.

It's not enough to sell squillions of iPhones, Apple also need to ensure that it creates squillions of happy iPhone users. The iPhone isn't like an iPod, which you just buy and use. A phone needs to be connected to a phone network, otherwise it's useless. Many aspects of that network are beyond Apple's control and I believe that Apple were deliberately suppressing demand a little to allow AT& T a better chance of keeping up.