Apple's iPhone pricing: too high or too low?

Apple iPhone followers got two conflicting pieces of data regarding its $499 price point. In one survey done by an online shopping firm Compete as reported by MacWorld UK, only one percent of the consumers who said they were likely to buy an iPhone said they would pay $500 for it. Sounds bad right? Stay tuned -- there's a gotcha in that survey that I'll address in a minute.

On the other side of the pricing gap, though, was an article in today's Boston Globe that insists that increasingly, cell phone buyers are insisting on style over circuitry. That report features a lovely portfolio of cell phones that are currently hot fashions, including the Prada/LG black touch-screen phone and the Dolce & Gabbana gold RAZR. Not one of the phones featured with a price had a price less than $700, making the $500 Apple iPhone look like the bargain of the bunch. So which view should we believe?

Blackfriars view is that Apple is marketing the iPhone, not as a phone for "the rest of us", but as a mass-market luxury item. Designer products such as those noted in the Globe article have high prices for one essential reason: they create exclusivity and thereby, desirability. Apple has chosen a relatively high price for the iPhone for the same reason: to position it as an aspirational purchase, similar to a Fendi handbag or Jimmy Choo shoes. And by introducing it at $500, iPhones will remain rare enough that they will garner the same types of attention, at least for the first year or two.

Can Apple succeed with such an exclusive position? I think so. Remember, Apple is only aiming to sell about 10 million iPhones by the end of 2008. That's still a pretty exclusive product in a market of one billion phones worldwide. And as the Globe article notes, there are certainly 10 million people who will consider $499 a small price to pay for having an exclusive bit of electronic fashion. I believe that despite the company having orders for 12 million iPhones to be manufactured. Apple won't be able to keep iPhones in stock for most of its first year of availability, even at $499.

So what about that survey that Compete did? Well, let's look at the data quoted in the article:

Online market research firm Compete surveyed 379 people in the US, most of whom had heard of the iPhone and have shopped for an iPod, to find out how interested they are in the device to produce the uncommissioned report. The iPhone is a combined music player and cell phone that Apple plans to start selling in the US in June and in Europe by the end of the year.

Among the 26 per cent of respondents who said they're likely to buy an iPhone, only 1 per cent said they'd pay $500 for it. When Apple introduced the iPhone in January, it said it would cost $500 on the low end.

Forty-two per cent of those who said they're likely to buy the phone said they'd pay $200 to $299.

Let's do some math now. 26% of 379 people said that they were likely to buy an iPhone. That 98 respondents. Now the article says that 1% of those 26% would buy the iPhone for $500. One percent of 98 is .... one. One person out of 379 said they'd buy the iPhone for $500.

Now here, you have to actually wonder about that result and how they asked the question, especially when 42% said they'd buy one for $200 to $299. Did Compete ask those questions serially, or did they simply put the question up as follows:

What is the most you would pay for an iPhone?

• $500 or more
• $400 to $499
• $300 to $399
• $200 to $299
• less than $200

Since this was an online survey, this format is quite likely. And it will give quite poor data. Why? Because it causes the reader to believe that there will be alternative prices for the iPhone that are lower than $500! And if Apple sticks to its mass-market luxury item strategy, there simply won't be other prices available. The result: some of the people who said they'd only pay $200 to $299 will still buy the iPhone at $499 anyway.

The bottom line: mass-market luxury items are everywhere today, and they form one of the fastest growing segments of consumer products. Steve Jobs is smart enough to tap into that trend with a unique product. And he's going to sell millions of them at quite healthy profit margins as a result.

One more thing: by the time Christmas of 2008 rolls around, Moore's Law says that the price of the electronics in the iPhone will be half what they are now. Don't be surprised if those 46% of consumers get their $299 iPhone then; they just have to wait eighteen months before it makes business sense for Apple to sell it at that price.

Technorati Tags: Apple, Compete, Dolce & Gabbana, Fashion, iPhone, Marketing, Prada, Pricing