iPhone 5C. Source: Apple Inc. (NASDAQ:AAPL).
Going into yesterday’s iPhone announcement, the biggest unanswered question was the iPhone 5C’s pricing. The phone was largely expected to have an unsubsidized price somewhere between $400 and $500.
We were way off mark. Apple Inc. (NASDAQ:AAPL)‘s iPhone 5C retails for $549 — just $100 less than the iPhone 5S. With shares down about 5% today, investors clearly disagree with the pricing decision. What’s Apple thinking?
What about the important Chinese market?
The mid-tier smartphone market in China is in the $300 to $400 range, according to Wedge Partners analyst Jun Zhang. At $549, Apple Inc. (NASDAQ:AAPL) wasn’t even close. If the company managed to pull off a pricing point in the $400 to $500 range, it would at least be borderline. But $549?
And, of course, U.S. iPhone prices don’t carry over very gracefully into China. According to Apple’s China website, the 16GB iPhone 5C retails for RMB 4,488, or a whopping $733.
There’s no way around it: Apple Inc. (NASDAQ:AAPL) simply isn’t gunning for the mid-tier smartphone market.
Fortunately, however, Apple Inc. (NASDAQ:AAPL) didn’t kill the iPhone 4 in China like it did in the U.S. It’s arguably the only iPhone that lands in the mid-tier with a retail price of RMB 2588, or $423. Even so, the iPhone 4 is a three-year-old iPhone. Will this aging technology continue to sell?
For many investors, Apple Inc. (NASDAQ:AAPL)’s pricing decision for the iPhone 5C is disappointing news. The opportunity in China is enormous. In the second quarter, Apple’s iPhone shipments accounted for just 4.8% of all smartphone shipments in the country, according to recent data from Canalys. There is a large untapped market that Apple isn’t attracting, and it doesn’t look like that’s going to change.
So what is Apple’s strategy?
Margins.
Apple Inc. (NASDAQ:AAPL) will be able to collect much higher up-front profit at $549. Piper Jaffray’s Gene Munster believed that the iPhone 5C would carry a 15% gross profit margin at an unsubsidized price of $300. If his estimates of Apple’s component costs for the 5C were correct, the plastic-backed smartphone would likely boast a monstrous gross profit margin. Even if he underestimated the 5C costs, the smartphone’s $549 price tag still merits an impressive gross profit margin.
Will the strategy work?
Though Apple Inc. (NASDAQ:AAPL) didn’t improve its value proposition to the mid-tier smartphone market in China, the company did manage to beef up its offering in the high-end segment.
The iPhone 5s boasts some impressive improvements. The 5C maintains the 5’s CPU power while adding some flair with five bright colors and improving battery life. And with the elimination of the iPhone 5, there is a clear hierarchy and a strategic pricing strategy among the three top iPhone models: the iPhone 5S, 5C, and 4S.
If Apple Inc. (NASDAQ:AAPL) can successfully market these models and make up its lack of volume with excellent profit margins, the company could surprise investors. But at this point, Apple will have to prove that this pricing strategy will work because it’s not what anyone expected.
What do you think? Is Apple Inc. (NASDAQ:AAPL)’s strategy to focus on profit margins the right decision?
The article Could the Not-So-Cheap iPhone 5C Disappoint? originally appeared on Fool.com.
Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends and owns shares of Apple.
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