The Cost of iPhone 7 Is Just $225: Is The Selling Price at $649 Justified?

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Apple Inc. (NASDAQ:AAPL) is speculated to operate with a gross margin of about $424 on iPhone 7. A preliminary estimate from IHS Markit revealed the bill of materials (BOM) for an iPhone 7. The hardware cost of iPhone 7 equipped with 32 GB of NAND flash memory is $219.80, and the assembling cost is $5. This brings the total manufacturing cost of iPhone 7 to $224.80. However, the price of iPhone 7 is starting from $649.

The cost is $36.89 higher than that of iPhone 6S due to upgrades like A10 chip, better camera, taptic engine, larger battery and increased storage. Apple also introduced a new jet-black iPhone which uses advanced technology to give it a perfect glossy finish and keep it strong. The cost is lower when compared to its main competitor Samsung Galaxy S7, which is about $255. Even though material costs are higher than in the past, Apple makes more margins from hardware than Samsung.

The flash storage of 32GB costs only $16.40 including the 2GB RAM, but Apple charges $100 more for the upgrade to 128GB. The IPS LCD in iPhone 7 cost is a maximum of $43. As reported by 9to5Mac, iPhone makes the majority of the sales for Apple providing it with a 38% gross margin as a business. So, as per the calculations, the final cost for an iPhone stands at around $400 including all other factors. The remaining $249 is the estimated margin on iPhone 7 as per the 38% margin rate.

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Although it is speculated that Apple operates with a margin of about $424, a product comprises of several other components like marketing, R&D, packaging, shipment, taxes and services. $649 also includes accessories like lighting earphones and charger.

Other Factors Affecting the Cost of iPhone 7

The $224.80 figure is only for the hardware. Apple is one of the highest spenders on R&D, marketing, and services. Apple spent more than $8 billion on R&D in its fiscal year 2015, which is a 34% increase compared to that of 2014. Frankly, this is comparatively higher than many automobile giants like GM, Ford, and Tesla. Apple also has to maintain 463 stores worldwide which undoubtedly adds to the cost, although the cost may be minor per unit. Reportedly, the company also spent $1.8 billion on advertising which is a record-breaking figure for the company and a 50% increase from 2014. The cost also includes the taxes paid by the company which touched $3 billion in the U.S. alone.

Apple is famous for its prompt service upon product related issues. The company replaces the device in case of minor issues like phone’s earpiece not working. The same policy applies to the accessories as well. For this level of service, the company needs to maintain higher margins. Apple iPhone also comes with other services like iCloud and iTunes which is free for the users to a certain extent.

Finally, the goodwill and brand value are other important factors that contribute in deciding the pricing standards. Apple targets the upper-class consumers with their iPhones and other products which can be maintained only through the pricing.

Regardless of all the costs behind the scenes, Apple has managed a successful launch. The iPhone 7 and iPhone 7 Plus devices went out of stock in many locations. Even the stock prices soared as the customer anticipation for the devices were higher than the predictions. According to our analysis, the pricing is justified. We say so because the company is obligated to maintain a standard along with all the other factors.

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