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The gray market impact on iPhone prices



The rise in iPhone ASP has led someone to conclude that Apple must have put its strategy to increase iPhone sales and user base by lowering prices. Instead, Apple says they are milking existing iPhone users with higher prices. This thinking stops ignoring how the expanding iPhone for refurbished iPhones contributes to new user growth and a higher iPhone ASP.

Gray Market Impact

A tenet of Apple's iPhone pricing strategy has sold older flagship iPhones at lower prices. For example, along with selling iPhone XS Max, XS and XR, Apple continues to sell iPhone 8, 8 Plus, 7 and 7 Plus. Apple even sells older models like iPhone SE and 6s Plus in selected markets. The company can run lower prices for these older flagship models due to economies of scale and improved manufacturing and assembly costs.

Traditionally, older iPhone models represented as much as 30% of total iPhone sales. Having such a significant portion of sales of devices that go to lower prices, iPhone models, held a lid on iPhone ASP. But things are changing. In 3Q1

8, non-flagship iPhone models probably represented only 20% of the total sales of iPhone devices. As the number of customers buying refurbished and pre-owned iPhones through the gray market is increasing, Apple sees less demand for the lowest priced iPhones in its setup. Customers in lower price brackets have additional iPhone purchasing options available thanks to the gray market.

Despite weaker demand for lower prices, Apple continues to see modest growth in iPhone demand. This tells us that the demand for new flagship iPhones has not gone down. Instead, demand for higher priced iPhones increases. Change in iPhone sales moment from cheaper, older flagship to higher prices iPhones contribute to higher iPhone ASP.

Gray Market Ingredients

Three key ingredients are needed to maintain a functioning gray market for iPhone.

  1. Good usability and ease of use . Simply put, iPhones need to keep up over time. A phone that barely lasts after two or three years of use does not contribute to a live, used market.

  2. Strong Demand for Refurbished iPhones. Many of Apple's competitors are missing a vibrant gray market in view of the lack of customer demand for refurbished products from that brand. In addition, other brands are directly addressed to lower price segments. However, given Apple's iPhone pricing strategy and the company's ambitious brand, there is a significant amount of interest and demand for refurbished iPhones at lower prices.

  3. Stable supply of carefully used iPhones. Services like early upgrade plans offered by mobile operators and Apple's iPhone Upgrade Program result in a stream of cautiously used, old-age iPhones that are turned off by customers. This supply of used iPhones is necessary to satisfy the demand for cheaper iPhones.

Durability and Usability

Last month's iPhone and Apple Watch event, Lisa Jackson, the Apple VP environment,
presented political and social initiatives, Apple's latest environmental goals to eliminate the need to get new materials from the ground . To stop mining of new materials, Apple will focus on three things:

  1. Find new ways to make products with recycled or renewable material.

  2. Make the products as long as possible.

  3. Recycle the products correctly.

] Increased durability allows not only existing customers to use Apple products anymore. The products can also enter the gray market and eventually be used by more people over time.

In terms of durability, Jony Ive and Apple's Industrial Design Group have been focused for decades on product design. Good product durability is a reason why there is already a strong gray market for iPhone. It is true that Apple designers sometimes find themselves between a rock and a hard place in terms of durability. Mobile batteries are a good example. The fact that iPhone users can not easily replace batteries is a shelf life to achieve other usage goals. But Apple's embrace of an iPhone battery program replaces management's desire to increase device durability within its iPhone strategy.

Meanwhile, Apple's focus on having iOS 12 support. Older iPhone models emphasized management motivation to enhance user-friendliness. By supporting iPhone models dating back to 5 years, Apple can retain tens of millions of devices, many of which have probably gone through the gray market and run the latest software. This proves to be beneficial when it comes to keeping these iPhones in circulation.

Strong Demand

Apple has the most popular smartphones in the market. This popularity translates to strong demand for iPhone, even at higher prices. The reason why iPhone sales are a fraction of total smartphone sales is that Apple is only playing in certain market segments. Such a decision stops giving a huge boost to the iPhone gray market, as it is unanswered demand for lower prices on iPhones.

The gray market allows Apple to reach customers who may not otherwise be in the company's traditional target market. While iPhones sold in the gray market are not included in Apple's revenues, the company benefits if sales to new users. Apple can sell services and additional hardware to these new users over time. This cycle becomes so much more effective, provided that an iPhone ends up being forwarded to three or four owners throughout the lifetime, with each ownership change going on at a lower price.

Steady Supply

Services like earlier upgrade plans offered by mobile operators and Apple's iPhone Upgrade Program are made possible by a functioning gray market. Robust residual values ​​make it economically possible for users to turn on gently used iPhones after making 12 monthly payments and go away with the latest iPhone. Many of these carefully used iPhones that are turned on, are then recycled in the market to find a new home. This creates the supply to the iPhone gray market needs to maintain itself.

Exhibition 2 highlights iPhone residual value as a percentage of the original launch price. After the first year, iPhone's remaining value is about 40%. This means that an original iPhone 8/8 Plus ownership in the device after one year can expect to receive 40% of the device's original cost. The percentages come from iPhone yield values ​​offered through Gazelle. It is important to note that iPhone users can find better incoming values ​​elsewhere, such as warehouse credit through Apple.

Exhibition 2: iPhone remaining value


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