Apple's ASP and the difference between cost and value

There's an incredible difference between what something costs and how much value we derive from it. Apple's success hinges on their understanding of this — we'll pay more for something that we believe makes our lives better. Sometimes "better" is prestige or cachet, sometimes it's adrenalin or excitement, sometimes its time saved or work accomplished. Often it's a mix. Yet it's what led Apple not only to record profits this quarter, but to the record average sales prices (ASP) behind them.

Apple's ASP for the iPhone went from $637 last year to $687 this year, an increase of $50.

Part of that is from Apple releasing the more expensive iPhone 6 Plus, which adds $100 to the cost of a similar capacity iPhone 6.

Part of that is also from Apple reducing the cost of higher storage capacities, offering 64GB this year for the same price as 32GB last, and introducing 128GB for the same price as 64GB last year. It makes adding another $100 or $200 to move up from 16GB much more enticing.

Apple's ASP for the Mac increased by $58 sequentially.

The actual ASP numbers weren't given, but the same pattern seems to hold. People know enough about high-density displays now that they're willing to pay more for an iMac with Retina 5K than they are for one without. That an iMac with a Retina display costs roughly what competitors charge for just the display also makes it enticing.

Look no further than Apple's results in China last quarter for more evidence of the same. It's a part of the world others believe can only be served by racing to the bottom — by dropping cost at the expense of value. Yet here's what Tim Cook believes, from our first quarter 2015 financial results transcript:

The local competition was obviously there this quarter, and it has been there for many quarters before, and so the local competition isn't new. I think we did really well there; I'm very proud of how we're doing.I was there in — right after the launch [of the iPhone] in October, and the excitement around the iPhone 6 and 6 Plus were absolutely phenomenal. And you can see that in the results with mainland China being up 100 percent year on year, despite not having a full quarter of sales since we launched in the second half of October.

That local competition is the non-Google Android vendors who are putting the squeeze on Samsung on the low-end even as Apple puts the squeeze on from the high-end. It's a market segment that, like netbooks, Apple wants no part of. Thanks to that, it's also a race to the bottom Apple is largely insulated against. Again, it's because Apple understands —  Those customers aren't Apple's customers.

John Gruber, writing for Daring Fireball:

The conventional wisdom just two years ago was that Apple needed to create a low-priced iPhone — not just lower-priced but low-priced — to compete in "emerging markets" like China. That would be true if Apple were interested primarily in market share. But they're not, never have been, and never will be interested primarily in unit sale market share. Far from hurting them, Apple's commitment to the premium end of the phone market is helping them separate from the pack in China.

Going after the under $400 phone market by making a cheap phone offers enormous risk for little reward. Going after the additional segments of the over $400 phone market — phones with displays over 4-inches in size, for example — offers low risk and, well... we've all seen the reward.

From iPhone to iPad to Mac, Apple is providing premium computing experiences at increasing size intervals and price points. Starting soon, it'll be from Apple Watch to iPhone to iPad to Mac, and the increasing price points will top out not at 128GB or 27-inches but at gold.

Apple can do that because they're not targeting cost. They're targeting value.

Rene Ritchie

Rene Ritchie is one of the most respected Apple analysts in the business, reaching a combined audience of over 40 million readers a month. His YouTube channel, Vector, has over 90 thousand subscribers and 14 million views and his podcasts, including Debug, have been downloaded over 20 million times. He also regularly co-hosts MacBreak Weekly for the TWiT network and co-hosted CES Live! and Talk Mobile. Based in Montreal, Rene is a former director of product marketing, web developer, and graphic designer. He's authored several books and appeared on numerous television and radio segments to discuss Apple and the technology industry. When not working, he likes to cook, grapple, and spend time with his friends and family.

  • I think value is very subjective. Value could be to one customer the locked down nature of OSX, or the app ecosystem of iOS. Or going the other direction value could be the upgradability of a windows PC, the customization of android, or etc. is there not value in those things as well?
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  • If actual ASP numbers weren't released how does anyone know what the ASP numbers are? oh, and Apple currently does sell two sub $400 phone models (the cheapest being $367 as of this post), meaning that is a market they very much want a part of.
  • ASP = total revenue from product / total units Apple reports units sold and the revenue from the big legs of their stool (iPhone, iPad, Mac, Services, other), so the number is easily derived for Apple. For Samsung, they report out the total revenue from their "Integrated Mobile" devices unit or some such. Analysts know that smartphones form the vast majority of that category and its not coming from say wireless modems, and they assume say 95% of the revenue is generated by smartphones. For units and ASP, it's a counting game. Some people count channel units, some people survey stores (inventory, sales to customers, etc), some survey the user base, some count the boats leaving the dock, some have supplier moles. Based on these disparate information, they can tell which units Samsung are selling the most of, put it in their spreadsheet, and voila, units sold and an ASP pops out.
  • Apple released actual ASP numbers for the iPhone, and gave the delta for the Mac, as mentioned above. The cheapest phone Apple currently sells is the iPhone 5c at $450, which has been their lowest price tier going on several years.
  • It's not clear there was a delta for the Mac ASP as you wrote it increased by $58. The cheapest iPhone Apple currently sells is the 8gb 5c (it used to be the 4s until Sept) which sells in India for Rs 22,500 (or $367 USD). The iPhone situation in India is all messed up, so it's unclear how long this will be the case.
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  • Moving up from 16G is anything but enticing to many. I'm not gaining value by paying yet another $100 to obtain a usable phone. Apple is wringing every dime out of those able to pay. (Not preparing the 5s for Apple Pay is another example). They don't want to race to the bottom but eventually more and more customers will be priced out. Clearly that's not a concern to Apple. Sent from the iMore App
  • You're getting 4x the storage for $100, how is that not providing value? (You can argue they shouldn't sell the 16GB version, but that wouldn't make the 64GB cheaper.)
  • Apple should really drop 16 gigabytes. I love that they went straight from 16- 64 making it as said more enticing to put out 100 dollars more but nonetheless 16 is barely scrapping along anymore and not everyone has that extra 100 dollars. Apple should make for. 256 iPhone next and have a 64-128-256 lineup. That'll be amazing
  • Most people keep their phone for the two year contract. Meaning that the extra $100 is essentially $4.17 a month over the life of the phone. Worth it for 4x the storage. Sent from the iMore App
  • This is why I splurged and got the 64 GB iPhone 6. For the exact same price as I had paid for my 32 GB iPhone 5S (US$750), I got a bigger screen, a better camera, longer battery life, and twice the internal storage. Not a bad deal, really, for quite a worthy upgrade.