If you’ve ever shopped for a smartphone
before, you’ve probably seen sales like this one from Samsung. Or this one from Google. Android smartphones go on sale fairly regularly,
so it’s pretty easy to purchase one for less than retail price. But when it comes to the iPhone, that’s
nearly impossible. Apple never offers sales on their smartphones,
even though they’re some of the priciest in the industry. Instead, Apple encourages customers to trade-in
their old iPhone for a discount, or sign up for the iPhone Installments program to make
the full payment over a longer period of time. So why is Apple so averse to running iPhone
sales? They’re already making so much money, and
they could sell a lot more units if they lowered the price, right? Well, that’s exactly what I’m going to
explain in this video. This is Greg with Apple Explained. Today’s topic came in a resounding first
place in the last voting poll. If you didn’t get to participate, make sure
you’re subscribed and voting polls like this one will begin appearing in your mobile
activity feed. Alright so why doesn’t Apple just lower
the iPhone’s price a little bit to get more customers? Well, in order to figure out why, we have
to understand their business model. Which relies heavily on hardware sales. Consider Google, they make 74% of their revenue
from ads. Which involves capturing user data and selling
it to advertisers. In order to have user data to sell, they need
users. That’s why so many of their software products
are free. The money they’d make from selling their
software to customers pales in comparison to what they make off user data. Hardware sales make up such a tiny percentage
of Google’s earnings that they included it in their miscellaneous category that not
only includes their Pixel smartphone and Nest home products, but also digital sales from
their google play store. And all of those things combine, only amount
to 12% of total revenue. Compare that to Apple, who makes 78% of their
revenue from hardware. And although having more customers would be
beneficial to their services business, since that means more potential iCloud, Apple Arcade,
and Apple News Plus subscribers, Apple’s primary focus has always been and continues
to be on profit from hardware. And profit is the key word, not revenue. Selling an iPhone 12 for $500 would give Apple
$500 in revenue, but they wouldn’t make any profit since it costs about $500 to make
the product. That’s why emphasis on profit margin is
so important. And it’s also why Apple will never sell
a television set, since the margins in that industry are razor thin. I’ll actually be explaining more about that
in an upcoming video so be sure you’re subscribed to catch it. But understanding profit margin is crucial
to recognizing why Apple never runs sales. Margins in the tech market are known to be
slim compared to other businesses like clothing. Where manufactures markup their product by
100 to 250% or more. That’s why stores like H&M can run sales
all year round and still make huge profits. But technology is not only more competitive,
it’s also more costly. Bringing something like a smartphone to market
not only requires investment in research and development for the hardware, but also in
software development for the operating system. And the problem is these costs are so high,
that tech companies can’t charge 250% markups since it would make their product prohibitively
expensive. So they typically use other business models
to make money. Like the example with Google I mentioned earlier,
or even a company like Amazon. Who sells their their Kindle Fire tablet at
a loss, since their business model isn’t based on hardware sales, but rather media
sales like ebooks, which 80% of Kindle users have purchased. But Apple made the decision a long time ago
to avoid this business model. Since it results in a race to the bottom that
doesn’t benefit the company nor the user. Amazon isn’t trying to make the best tablet
possible, they’re simply trying to make it as cheap as possible. So they can get their high-margin ebooks into
as many hands as possible. And while there’ll always be a market for
cheap electronics, that’s not the demographic Apple targets. Instead, they go the opposite direction. Hoping, that by offering a superior user experience,
customers will pay a premium for their product. It worked with the Mac, which only made up
about 7% of all computers sold in 2019. But accounted for almost 14% of the entire
market’s revenue. That’s because Apple’s profit margin is
much wider than the competition. Companies like Dell try to price low and sell
a high volume of computers. While Apple is happy to sell a lot less, as
long as their margins remain high. And that philosophy applies to every product
they make. That’s why, when the iPhone debuted in 2007,
it was the most expensive phone on the market. With many believing the price was out of reach
for the average smartphone customer. But Apple didn’t mind if only a fraction
of customers bought their product. In fact, when Steve Jobs introduced iPhone,
he clearly outlined Apple’s sales goal. Hoping to capture 1% of the mobile phone market
in 2008. That was a tiny number, something they’d
already exceeded with the Mac. But because the phone market was so big, a
1% share amounted to about 10 million units sold, and about five billion in revenue for
Apple. But what actually happened was far better. The iPhone didn’t experience the same marketshare
ceiling as the Mac, which Apple may’ve expected to be the case. Over the years, the iPhone went on to dominate
the US smartphone market with a 60% share. Dwarfing second-place Samsung with 24%. And that success resulted in an unprecedented
amount of revenue for Apple. But all that success came with a problem. How would Apple ensure their revenue grows
year over year? With the Mac, they never even approached market
saturation of their product, so their goal was always to attract as many PC switchers
as possible and capture just a little more market share every year. But the iPhone had been far and away the market
leader in the US since its release. So the growth strategy of attracting new customers
didn’t make sense, since Apple already had the majority. So in order to make more money, they were
forced to raise prices. That way, they wouldn’t have to sell more
units to make more profit. And over the last five years, we’ve seen
Apple push the limits of how much customers are willing to pay. The iPhone price hikes began in 2017 with
the iPhone 8, 8 Plus, and X. For the first time ever, Apple was selling
an iPhone for $1,000. If you wanted the larger capacity model, the
price was $1,149. This raised the iPhones average selling price
from $606 in 2017 to $724 in 2018. Boosting Apple’s annual revenue 17%. But more importantly, was the 32% increase
in profit. Had Apple not raised prices, they would’ve
had to increase their customer base by at least 32% to achieve the same profit boost. But that big of a jump is not only virtually
impossible, but also completely irrelevant. Apple actually gained more customers when
they raised the iPhone’s price to $1,000. So lowering it back down would be completely
counterproductive. Since there’s no way they’d suddenly achieve
a 40 or 50% boost in sales that they’d need, just to match their profits from the previous
year. And that’s exactly why Apple will never
lower the iPhone’s price to try and sell more units. If they did, they would literally lose billions
in profits overnight. And Tim Cook would probably be fired as CEO,
all in an attempt to sell a few more units. Alright guys so that is why iPhones never
go on sale. If you want to find out why Apple will never
make a television, make sure you’re subscribed, and I’ll see you in the next video.
