iPhone Pricing Strategy: A Financial Analysis of Apple's Potential Price Increase
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Exercise 3 – Analyzing the Financial Impact of Price and Volume Changes on Apple iPhones
Apple iPhone Sales and Manufacturing Costs
In 2014, Apple sold approximately 150,000,000 iPhones at a price of $640 per unit. The company's average manufacturing cost per iPhone is detailed in Table 1.
| Component | Cost (USD) |
|---|---|
| Flash Memory & RAM | 20.85 |
| Display & Touchscreen | 44.00 |
| Processor | 17.50 |
| Sensors | 6.50 |
| Cameras | 18.00 |
| Cellular Radio | 34.00 |
| Wireless Radio | 5.00 |
| Battery | 4.50 |
| Power Management | 8.50 |
| Mechanical Parts | 33.00 |
| Packaging | 7.00 |
| Production | 8.00 |
| Licensing Fees | 20.00 |
| Source: http://www.digitaltrends.com/mobile/iphone-cost-what-apple-is-paying/ | |
Table 2 outlines Apple's fixed costs associated with its iPhone business.
| Category | Cost (USD) |
|---|---|
| R&D | 589,000,000 |
| Marketing and Sales | 732,000,000 |
| Administrative Costs | 600,000,000 |
| Source: http://www.digitaltrends.com/mobile/iphone-cost-what-apple-is-paying/ | |
Scenario 1: Premium Pricing Strategy
Apple's management is exploring strategies to enhance profitability, considering the potential of positioning its new iPhone model as a premium product with a 25% price increase.
Questions:
a) Maximum Tolerable Sales Loss with a 25% Price Increase
What is the maximum percentage and unit sales decline Apple could absorb with a 25% price increase while maintaining a positive contribution to profitability?
b) Impact of Feature Upgrades on Sales Loss Tolerance
To position the new iPhone as a premium device, Apple plans to incorporate the following upgrades:
- Enhanced processor: $25 (up from $17.50)
- Improved sensors: $10 (up from $6.50)
- Extended battery life: $8 (up from $4.50)
Given these upgrades and the 25% price increase, what is the maximum sales loss Apple could tolerate while still increasing its net profit?
c) Impact of Increased Advertising Budget on Sales Loss Tolerance
Repositioning the iPhone will necessitate a $200,000,000 increase in Apple's advertising and sales budget. Considering the changes in parts 'a' and 'b' of Scenario 1, what is the maximum sales loss Apple could withstand while ensuring a net profit increase with the 25% price hike?