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Can Apple afford to go cheaper with new iPhones?

Conventional wisdom says Apple both desperately needs a cheaper iPhone model to compete with low end Android and Nokia offerings, while also holding that lower margins would destroy the company's profitability. Its history offers examples of reaching a middle ground.


Is Apple's high end iPhone 5 failing?

Apple's stock tumbled 5.3 percent this week after speculation that $20 million worth of extra inventory at a key supplier must mean iPhone 5 sales are slipping. Of course, it could also mean that Apple shifted to either a new supplier or a new generation of components.

At the same time, top U.S. carriers AT&T and Verizon Wireless released quarterly figures that indicate that not only are iPhone sales higher than the previous year, but that iPhone 5 continues to account for half of all iPhone sales.

Since Apple doesn't detail the exact mix of iPhone models being sold globally or for each region sales group (for competitive reasons), carrier reports are helping to illuminate the fact that most of the new iPhones being sold are Apple's latest and greatest model.

That's in sharp contrast to Samsung in Q4, when just 15.4 million, less than a quarter of its total 60 million phones sold, were its higher end Galaxy S3. The 2011 iPhone 4S by itself beat the Galaxy S3 by two million units globally and iPhone 5 sold 27.4 million units.

Source: Strategy Analytics

Apple continues to struggle to make enough iPhones to meet global demand, so finding a market for high end iPhones is not as much of problem for the company as its competitors, who continue to ship phones and tablets that often don't end up actually getting sold to end users.

Apple may however need to more aggressively target the low end of the market.

But Apple never competes on price, right?

Asked when Apple would build netbooks in 2008, Steve Jobs famously said "we don't know how to make a $500 computer that's not a piece of junk, and our DNA will not let us ship that."

A report by Jun Yang, Anand Krishnamoorthy and Jungah Lee, published by Bloomberg in February insisted that Apple's new chief executive Tim Cook "already reversed a vow by late founder Steve Jobs that the company wouldn’t introduce a scaled-back and cut-price version of the iPad."

Of course, Apple has actually cut its prices before. WebObjects dropped from $50,000 to $699, and then became free. Mac OS X Server unlimited dropped from $1,000 to $499 to $49.99. Final Cut Pro dropped from $1000 to $299. Aperture fell from $499 to $79.99.

Well perhaps Apple just doesn't lower prices in hardware, then? No that's not right either; the company extended its dominance in digital music players a decade ago by introducing the iPod mini and then the iPod nano and shuffle. Three years into the iPad, Apple similarly released its smaller, lighter, cheaper and slightly less profitable iPad mini.


And don't forget the Mac mini and Mac mini server, or the much cheaper $99 Apple TV that replaced the original priced at $229. And we don't even need to discuss cheaper Macs, iPods and iPads because Apple has also sharply discounted the iPhone itself, starting with the original model that was repriced from $599 to $399 within months of its unveiling.

Then, one year later, Apple introduced the improved iPhone 3G model with a cheaper build, packing more power and features in a plastic case that allowed it to sell for half the price, just $199 on contract.

Since then, each new generation of iPhone kept getting better at the same price, and previous years' models are now sold at a $100-200 discount. This pricing pattern has allowed Apple to offer a "good, better, best" selection that ranges from $0 to $199 with a contract.