Why the iPhone 11's Price Drop Is So Meaningful

For many years, the newest Apple (NASDAQ: AAPL) flagship iPhone would launch at the same $650 starting price point. But everything changed in 2017 when Apple launched the iPhone 8 and iPhone X, which started at $700 and $1,000, respectively. Not only did Apple test the limits of its pricing power by positioning the flagship iPhone X at an unprecedented level -- a move it has had to continue defending -- but it also increased the price of the more affordable model by $50. The Cupertino tech giant did likewise in 2018 by pricing the iPhone XR at $750, while the flagship starting prices were unchanged.

That all led to iPhone average selling prices (ASPs) marching higher. (ASP data is no longer available since Apple stopped disclosing unit volumes nearly a year ago.) Yesterday's news that the iPhone 11's starting price was coming back down by $50 to $700 was an incredibly rare move by Apple. Here's what it means for investors.

Chart showing iPhone ASP over time

Data source: SEC filings. Calendar quarters shown.

Walking back pricing

The price drop is implicit acknowledgment that Apple needs to start coming down on price, because high prices have been limiting demand, especially in some crucial emerging markets. Since the iPhone 11 is a successor to the iPhone XR and shares the majority of its design elements, costs to produce the device have also declined, since new products always start at the height of their cost curves.

Instead of pocketing those savings to pad its margins, Apple has chosen to pass along those savings to consumers in the form of lower prices. That's even more notable now that Apple is facing higher costs associated with President Trump's tariffs. Instead of using savings to offset tariffs, Apple is absorbing tariff impacts and still trying to lower prices.

iPhone 11 in various colors getting splashed by water.

iPhone 11 starts at $700. Image source: Apple.

Throughout 2019, Apple has been taking various actions in key emerging markets like China, such as absorbing foreign exchange fluctuations, in an effort to keep prices as low and stable as possible. "We're seeing positive customer response to recent pricing actions in certain emerging markets," CFO Luca Maestri said in April.

During the keynote, CEO Tim Cook also noted that the iPhone XR "became the most popular iPhone and the most popular smartphone in the world," which suggests that reducing the price of its successor will have broad-based positive impact if the iPhone 11 can build on that momentum. It was always going to be challenging to walk back iPhone pricing, particularly for the more expensive flagships, but it's easier to justify price cuts for a model that is specifically positioned as more affordable for mainstream consumers.

Market researcher IDC expects that iPhone shipments will decline by 15% this year, so the price cut is clearly an effort to prop up those unit volumes.

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Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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