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For Apple, new and refurbished iPhones are two sides of a coin

Pricing strategy aims to polish luxury brand image while expanding customer base

Apple's new iPhone XS and XS Max are displayed at the Apple Store in Tokyo on Sept. 21. (Photo by Kei Higuchi)

TOKYO -- The latest iPhones hit stores on Friday. Apple surprised tech industry observers with a bold pricing strategy, but it is yet unclear how much buzz the new devices will create, with lower priced Chinese smartphones gaining popularity. 

The iPhone XS has a 5.8-inch screen, the same size as the iPhone X released last year, while another new model, the XS Max, comes with a 6.5-inch screen.

The entry-level model in the iPhone XS family is priced at $999 for 64 gigabytes of memory, while a 64-gigabyte XS Max carries a price tag of $1,099. The top-of-the-line 512-gigabyte XS Max goes for $1,499.

The new models go on sale at 8 a.m. local time in each market. Due to time difference, Japan is one of the first countries where it becomes available. 

About 250 people were waiting outside the Apple Store in Tokyo's chic Omotesando district, hoping to be the among the first to get their hands on the devices. That is only about half the number that lined up for iPhone X, the previous model.

"The big screen was quite appealing," said a 20-year-old who had bought an XS Max. Stores in China, Hong Kong, Taiwan and Singapore started selling the new models later in the day.

Those prices might sound outlandish, but Apple believes many people will continue to pay for its unique cachet. And amid the glitz of iPhone rollout events in northern California, the company is cutting the price of older models and supporting a roaring trade in used and refurbished handsets to expand its customer base.

The iPhone is becoming, more than ever, a luxury good: Sales growth is slowing in volume terms while the average sales price rises. In the April-June quarter, Apple eked out a small rise in iPhone unit sales, which reached 41.3 million, up from 41.0 million a year earlier. But the average price for the handsets jumped to $724 from $606 during the same period last year. That helped lift Apple's revenue to a record $53.3 billion for the quarter.

Leading the charge was the $999 iPhone X. At the time of its release, many analysts doubted the pricey gadget would attract buyers. But its global popularity proved that Apple knows its customers.

The strong performance of the iPhone X lifted the average iPhone price by nearly 20%. The new XS and XS Max are even more expensive, suggesting Apple plans to aggressively target people who see their phones as a fashion statement, and are willing to pay.

 Apple has no chance of beating manufacturers in China and elsewhere on cost. So it is deliberately rolling out higher-end models to avoid the price wars others are waging.

That move has pushed the U.S. company down the global shipment rankings. It is now No. 3, behind Samsung Electronics of South Korea, Chinese manufacturer Huawei Technologies, according to data from IDC.

Still, many people who Apple wants to reach cannot afford an iPhone XS or XS Max. To these customers, it offers the iPhone XR. The XS and XS Max have an organic electroluminescent display and a dual-lens camera. The XR has a lower resolution liquid-crystal display and a single-lens camera. The 64-gigabyte XR is priced at $749.

Apple's rollout of the iPhone XR appears aimed at preventing Apple's customer base from shrinking further. In addition, it has cut the prices of older models. The iPhone 7 and iPhone 7 Plus, released in 2016, and the iPhone 8 and iPhone 8 Plus, which came out last year, are all nearly $100 cheaper.

In Japan, fans can be seen waiting in line whenever a new model is released. Although the newest iPhones steal the spotlight, older handsets still sell well. Electronics shops pull in buyers with the cheaper iPhone 6S and iPhone SE, handled by UQ Communications and other mobile virtual network operators.

These older handsets coexist happily with the latest iPhones. Apple's strategy is aimed at maintaining the premium brand image of the iPhone, while expanding its customer base by cutting prices on older models.

But even the cheapest iPhones look expensive compared with the competition. The 32-gigabyte iPhone 7 is priced at $449, compared with less than $300 for Android smartphones sold in China and other emerging economies. Nevertheless, Apple believes it can hold its own even in such places.

There is a global market for used iPhones, which are inexpensive and widely available. That market is propped up in part by Apple enthusiasts in Japan, who upgrade frequently, trading in their old models for the latest version.

Carriers who offer iPhones as part of their service package sell these old handsets to brokers, who ship them to China and elsewhere. Phones that are in good condition are sold as is; damaged ones are disassembled and sold for parts. There is also a large market for refurbished smartphones, whose batteries are replaced and then resold.

Apple hopes buyers of used and reconditioned iPhones in emerging markets will opt for newer models as their incomes rise.

Analysts who focus on the eye-popping prices of Apple's latest iPhones overlook the fact that it is older handsets like the iPhone 7 and iPhone 8 that are its mainstream products. Apple believes it can hold on to those customers until they can afford its shiniest gadgets.

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