Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Apple Priced the iPhone to Own the Premium Market
Transcript
- Lucas: It is June of 2007, and Steve Jobs is on stage at Macworld. He holds up a device that looks like nothing else on the market — a slab of glass and aluminum, no physical keyboard, no stylus. And then he says the price: $499 for the 4-gigabyte model, $599 for the 8-gig. The room goes quiet for a second. Luna: Because that was insane for a phone. At the time, the average phone cost maybe a hundred to two hundred dollars off contract. A BlackBerry Curve was around $199 with a contract. Lucas: Right. The Motorola RAZR, which was the best-selling phone in America, had dropped to under a hundred bucks. So $499 unsubsidized — or even $599 — felt like a computer price. And in many ways, it was. But the pricing decision Jobs made that day is one of the most studied and most imitated in modern business, because it wasn't just about covering costs. Luna: So what was the actual strategy? Because I remember the early reviews — people loved the device but kept saying, 'It's too expensive.' Lucas: The strategy was twofold. First, Apple knew they were entering a market dominated by carriers — Verizon, AT&T, T-Mobile — who controlled the handset subsidies. The carriers would buy phones in bulk and sell them to customers at a discount, locking them into two-year contracts. Apple wanted a piece of that subsidy. Luna: Which is why they went exclusive with AT&T. The deal was that AT&T would pay Apple a monthly subscriber fee, essentially sharing the revenue from the plan. Lucas: Exactly. Apple negotiated roughly $10 to $20 per iPhone per month from AT&T. So the effective price to the consumer was subsidized—you could get an iPhone for $399, then later $199—but Apple's revenue per phone was much higher than any other manufacturer's. By 2009, analysts estimated Apple was making $600 per iPhone sold, even though the retail price was $199 with contract. Luna: So the $599 price tag was almost a decoy. It signaled premium, but most people never paid it. Lucas: That's exactly right. The high list price created what marketers call a 'price anchor.' It made the subsidized price feel like a bargain. But more importantly, it positioned the iPhone as a luxury good, not a commodity. Every other phone maker was competing on price—Samsung, Nokia, Motorola, all racing to the bottom. Apple said, 'We're not playing that game.' Luna: And that worked because the product was genuinely different. The multi-touch interface, the full web browser, the iPod integration—there wasn't anything like it. Lucas: Right. But the pricing itself reinforced the differentiation. If Apple had priced the iPhone at $299 unsubsidized, it would have seemed like just another phone. By pricing it at $599, they were saying, 'This is a premium device. You are buying something special.' And that perception held even as the price came down over time. Luna: It's interesting—they actually raised the price of the iPhone later. The iPhone X in 2017 started at $999. And people bought it. Lucas: Because Apple had trained the market. Once you establish that your product sits at the top of the price pyramid, you can push that ceiling up. The average selling price of an iPhone has gone from around $600 in 2010 to over $800 today. Meanwhile, the average selling price of all other smartphones has fallen. Apple captures something like 85% of all smartphone profits. Luna: Eighty-five percent. That's not just market share—that's pricing power. And it's not accidental. It's a deliberate strategy that starts with that first $599 price tag. Lucas: But there was a real risk. At the time, many analysts thought Apple would fail. The phone market was dominated by Nokia, which had 40% global market share. Microsoft was pushing Windows Mobile. Palm was still around. And here comes a computer company with a phone that costs twice as much as the competition. Luna: What was the internal debate? Did Jobs ever consider pricing it lower? Lucas: There's a well-known story from the book 'The One Device' by Brian Merchant. Jobs initially wanted to give the iPhone away and make money on iTunes and services. But the economics didn't work. The bill of materials for the 8-gig model was about $230. With R&D, marketing, and distribution, Apple needed a gross margin of around 50% to be profitable. That forced the $599 price. Luna: So the price wasn't arbitrary. It was driven by a target margin. And that margin gave Apple the cash to invest in better components, better design, better software. Lucas: Which created a flywheel. High price enabled high quality. High quality justified high price. Competitors couldn't match the quality without raising their own prices, but they were stuck in a low-margin race. And that's why, seventeen years later, Apple still dominates the premium segment. In Q1 of this year, the iPhone accounted for about 50% of global smartphone revenue, despite having only 20% of unit share. Luna: That's the definition of pricing power. You can charge more and still grow. Lucas: And it's not just about the iPhone. Apple extended that pricing model to the iPad, to the Watch, to AirPods. The same playbook: come in at a premium price, establish the category as aspirational, then slowly expand the lineup with lower-priced options that still carry high margins. The iPhone SE, for example, starts at $429, but its gross margin is still above 40%. Luna: One thing I want to push back on, though. A lot of people say Apple's pricing is pure brand magic. But there's real product substance underneath. You can't charge $999 for a bad phone, no matter how good your marketing is. Lucas: Absolutely. The pricing works because the product delivers. But the pricing also shapes the product. Apple's willingness to spend more on a stainless steel frame, a better camera, a faster chip—that's possible because they know they can price it high. It's a virtuous cycle. Other companies, like Samsung, try to do the same with their Galaxy S Ultra line, but they haven't been able to command the same premium because they still sell low-end phones that dilute the brand. Luna: There's also a psychological component. The high price signals status. People want to be seen with an iPhone. It's a luxury item masquerading as a utility. Lucas: And that brings us to one of the most fascinating aspects: how Apple managed to keep the iPhone feeling premium even as the market matured. In 2023, the average smartphone price globally was around $335. The iPhone average was more than double that. Yet Apple's market share in the U.S. is over 50%. They've convinced half the country that paying $800-plus for a phone is normal. Luna: So what lessons can other businesses learn from Apple's pricing? Because most companies don't have a Steve Jobs or a revolutionary product. Lucas: I think the core lesson is that pricing is a signal. If you price your product too low, you signal that it's a commodity. If you price it too high without substance, you fail. But if you can genuinely differentiate—even in a small way—then pricing above the market can actually strengthen your brand. It's not about being expensive; it's about being worth it. Luna: And being willing to walk away from customers who only care about price. Apple doesn't try to win the budget segment. They leave that to Xiaomi and Motorola. Lucas: Exactly. And that's a hard discipline. A lot of entrepreneurs feel like they have to compete on price to get traction. But if you have a product that solves a real problem in a unique way, you might be better off charging more and serving fewer customers well. The ones who will pay a premium are often more loyal and less likely to churn. Luna: Let me ask you this: Do you think Apple could have pulled off the same pricing if the iPhone had launched in 2007 with a different carrier? Say, if it had gone with Verizon, which had a stronger network? Lucas: That's a great counterfactual. AT&T's network was notoriously bad in the early iPhone years—dropped calls, slow data. But the exclusive deal gave Apple enormous leverage. Verizon probably would have demanded more control. The AT&T deal allowed Apple to keep the user experience seamless and to collect that monthly subsidy. So yes, the carrier choice was part of the pricing strategy. Luna: So it's not just the price tag. It's the whole ecosystem of pricing: the subsidy, the carrier deal, the brand positioning, the product quality. All of it works together. Lucas: And that's the real takeaway. Pricing is not a number you slap on a product. It's a strategic decision that affects every other part of your business—your costs, your customers, your competitors. Apple spent years crafting that strategy, and it's still paying off. Luna: If these conversations have pushed your thinking forward even a little, especially if you're running a business and wrestling with your own pricing decisions, it's worth knowing that this show stays ad-free because of listeners who chip in. You can find us at buy me a coffee dot com slash fexingo. No pressure, just a way to keep these episodes coming. Lucas: And it genuinely helps. We hear from listeners who say they've applied something they learned here to their own pricing—and that's the whole point. So thank you to everyone who's already supported the show. Luna: Alright, let's get back to the iPhone. Lucas, one thing I find interesting: Apple's pricing power has actually increased over time, even as the smartphone market matured. The iPhone 15 Pro Max tops out at $1,599. That's nearly three times the original iPhone's price. How do they keep getting away with it? Lucas: Part of it is that the iPhone has become an essential tool, not just a luxury. People use it for work, for banking, for health. The switching cost is huge—once you're in the Apple ecosystem, leaving means losing your apps, your data, your seamless integration with other Apple devices. That lock-in gives Apple pricing power. Luna: So the pricing strategy that started with a $599 phone evolved into a subscription-like model. You're not just buying a phone; you're buying into a platform. Lucas: Exactly. And that's the advanced stage of pricing power: when your product becomes so integrated into your customer's life that they are willing to pay a premium year after year. Apple has mastered that. And it all traces back to a pricing decision made in 2007.