Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

Apple Inc.'s Brilliant Apple Watch Series 3 Pricing Strategy

During Apple's (NASDAQ: AAPL) Sept. 12 product launch keynote, the company introduced the Apple Watch Series 3. The watch includes many cool improvements over its predecessor, such as a much faster processor, a better wireless chip, and a barometric altimeter.

The big new feature, though, was the cellular-enabled option to the Apple Watch Series 3 lineup in addition to standard ones that just have GPS and Wi-Fi connectivity.

Cellular capability affords the Apple Watch Series 3 much greater freedom from the iPhone than previous-generation Apple Watches could deliver, though enabling cellular connectivity requires that customers pay a monthly line access fee.

Image source: Apple.

While I'm impressed with the Apple Watch Series 3, something that might be just as impressive is Apple's pricing strategy for the product line. Allow me to explain.

Apple doesn't charge that much extra for cellular

All of the higher-end Apple Watch Series 3 watches -- that is, the variants with stainless steel as well as ceramic casings -- come with cellular capability built in by default.

However, I suspect that many, if not most, Apple Watch buyers will opt for the lower-cost versions with aluminum casings, especially since the functionality is identical between the ones with the aluminum casings and those housed in fancier materials.

What's interesting about the aluminum versions of the Apple Watch Series 3 is the relatively small price difference between the GPS and the cellular versions; it'll only cost you $70 more to get the Apple Watch Series 3 with an aluminum casing with LTE capability compared to one without.

I think that many buyers who don't intend to enable the LTE functionality will still opt for the versions with LTE connectivity just to be safe in case they want the functionality down the line. This phenomenon, should it play out, would be good for Apple as it'd mean an increase in Apple Watch average selling prices, overall revenue, and ultimately profits.

Improved financial results during this product cycle is always a good thing, but there's potentially a bigger-picture implication here as well.

Expect LTE in all new Apple Watches

My guess is that there will be an overwhelming mix shift toward Apple Watch models with LTE capability, which will ultimately give Apple the confidence to simply stop releasing variants that don't have LTE capability.

In fact, I wouldn't be surprised to see all new Apple Watches, beginning with next year's models, come with LTE capability built in.

Once a large portion of the installed base migrates to LTE-capable Apple Watches, developers will be free to develop applications that don't rely on the presence of an iPhone near the Apple Watch. 

Or, put another way, app developers can begin to assume that any Apple Watch that runs their apps will have access to an LTE connection -- something that they clearly can't do thanks to the large number of Apple Watch Series 1 and Apple Watch Series 2 devices out there (as well as potential Apple Watch Series 3 devices without LTE).

The potential widespread adoption of LTE across the Apple Watch installed base, coupled with the continued meteoric rise in the processing capabilities in each new Apple Watch, should combine to transform the watch into a highly robust mobile platform for app developers in the years ahead. 

Should the Apple Watch app ecosystem continue to gain momentum, particularly as other smartwatch/wearable device vendors seem to be having little success, Apple Watch could ultimately cement itself as the wearable computing platform of the future. 

10 stocks we like better than Apple
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of October 9, 2017

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.