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Why Apple Inc.'s iPhone 8 Won't Start at $900

Analyst Steve Milunovich, by way of AppleInsider, said in a recent note that he expects Apple (NASDAQ: AAPL) to price its hotly anticipated OLED iPhone at $900 for the variant with 64 gigabytes of storage, with a 256 gigabyte variant selling for $1,000.

I don't have any knowledge of how Apple plans to price its upcoming iPhone lineup, but I find this proposed pricing structure highly unlikely. Here's why.

Image source: Apple.

How Apple could price its new iPhone models

KGI Securities analyst Ming-Chi Kuo says all three of Apple's upcoming iPhone models -- the OLED iPhone, and the 4.7- and 5.5-inch LCD-packing versions -- will come in 64-gigabyte and 256-gigabyte storage configurations. Today's iPhone models come in 32-, 128-, and 256-gigabyte storage configurations.

If we take Kuo's information as true, and Kuo's track record is strong enough that I'm willing to base an analysis on his reporting, then I think if we work under the assumption that Apple will price aggressively, the pricing for the 4.7- and 5.5-inch iPhone models would look something like this:

  • iPhone 7s (64GB): $649
  • iPhone 7s (256GB): $749
  • iPhone 7s Plus (64GB): $769
  • iPhone 7s Plus (256GB): $869

I think it's not unreasonable to expect such a pricing structure, because Apple probably expects that such pricing could help it gain market share and increase shipment volumes, and that any margin degradation from these prices could be more than made up from sales of the premium OLED iPhone.

Now, let's suppose that Apple prices the entry-level OLED iPhone at $900 -- a mere $40 premium to the iPhone 7s Plus with 256GB of storage in my "aggressive pricing" scenario. I submit that this would be unworkable.

First, I think the average consumer would overwhelmingly choose the 64-gigabyte OLED iPhone for $900 over an $869 iPhone 7s Plus with 256 gigabytes of storage. The additional storage is nice, but it's not likely to be anywhere near as important to typical consumers than the much better cameras, display, and form factor than the OLED iPhone with 64 gigabytes of storage.

Selling $900 phones in place of $869 phones isn't inherently a problem. Here are the true problems with such a pricing structure:

  1. The OLED iPhone, even with 64 gigabytes of storage, should have a substantially higher bill of materials than the 256-gigabyte iPhone 7s Plus, because of the use of an OLED display, the addition of 3D sensing technology, enhancements to the front and rear cameras, and so on.
  2. The OLED iPhone should be much harder to build and is expected to be out in limited quantities early in the cycle. Since potential buyers won't have any reason to buy the potentially more readily available iPhone 7s Plus, buyers at the $900-or-so price point are likely to simply wait, negatively affecting Apple's nearer-term financial performance and iOS and iPhone ecosystem growth. 

So pricing the OLED iPhone at "just" $900 would, in my view, be a poor strategic move on Apple's part.

Expecting $1,000 or more

If I had to guess, I'd say that $1,000 for the 64-gigabyte model is the minimum reasonable price for this upcoming phone, with higher prices probably justifiable. I think, based on the rumored feature set, the relative affluence of the iPhone customer base compared with the overall smartphone-buying population, and the much more aesthetically pleasing design, that Apple can charge such a high price and still sell every one of these phones it can make -- and then some.

Apple would be ridiculous to short-change itself by pricing the OLED iPhone close to what it'll charge for the top iPhone 7s Plus model.

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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 a disclosure policy.