Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Apple Priced the iPhone for Maximum Margin
Transcript
- Lucas: It is June of 2026, and the most profitable product in human history is still the iPhone. I mean that literally — Apple has sold over two and a half billion iPhones since 2007, and the gross margin on each one is somewhere between 45 and 60 percent depending on the model. Luna: And that margin is the whole story, isn't it? Most hardware companies would kill for a 10 percent margin. Lucas: Exactly. And here's the thing — Apple doesn't compete on price. They've never tried to sell the cheapest phone. In fact, the average selling price of an iPhone has gone up over time, from about 500 dollars for the first model to over a thousand dollars today. And they've done it by pricing for margin share, not market share. Luna: Margin share — that's a great way to put it. They'd rather own 80 percent of the industry's profit than 80 percent of the units. Lucas: Right. And before we go further, I want to thank the listeners who make this show possible. We don't run ads — this podcast is funded entirely by a small group of supporters who chip in through buy me a coffee dot com slash fexingo. If these conversations have moved your work forward in some small way, that's the reason we can keep doing them. But let's get into how Apple actually built that pricing machine. Luna: Yeah, I've been curious about this for a while. It seems like they just have this magic ability to raise prices without losing customers. Lucas: It's not magic — it's a deliberate architecture. And it starts with the three-tier lineup. Apple sells basically three iPhones each year: the SE, the regular model, and the Pro. The SE is the entry point, around 429 dollars. The regular model, say the iPhone 17, is 799. And the Pro Max is 1,199. Each tier is priced to feel like a step up in value, not just in cost. Luna: And the spread is wide enough that the Pro model feels almost luxurious, even though the bill of materials is maybe 50 dollars more. Lucas: That's exactly the point. I remember reading an analysis from TechInsights a few years back — they estimated the iPhone 14 Pro Max's components cost about 464 dollars. So at 1,099 dollars retail, you're looking at roughly a 60 percent gross margin. Compare that to the base iPhone 14, which had a bill of materials around 360 dollars and sold for 799 dollars — that's about 55 percent margin. So the Pro is even more profitable. Luna: So they're not just upselling you to a better camera — they're upselling you to a higher-margin product. Lucas: Exactly. And then there's the storage tier pricing. This is one of the oldest tricks in the book, but Apple executes it perfectly. The base iPhone 17 Pro might come with 256 gigabytes of storage. If you want 512, that's an extra 200 dollars. If you want 1 terabyte, that's another 200. But the actual cost of that NAND flash memory? Maybe 30 dollars per step. So that extra storage carries something like an 85 percent margin. Luna: And of course you can't upgrade later — it's soldered in. So once you buy, you're locked in. Lucas: Right. And the beauty of this is that it feels like a choice. You're not being forced to pay 1,400 dollars for a phone — you're choosing to pay 200 more for extra storage. The psychology is completely different from a straight price increase. Luna: So what about the services angle? I know Apple has been pushing services as a growth driver. How does that play into the pricing story? Lucas: Huge. In fiscal 2025, Apple's Services revenue was about 85 billion dollars. That includes the App Store cut, iCloud, Apple Music, AppleCare, and now things like Apple TV Plus. And the margin on services is around 70 percent — way higher than hardware. So the iPhone becomes a gateway. You buy the phone, and then you're in the ecosystem, spending on subscriptions and storage. Tim Cook once said that iPhone users spend about twice as much on subscriptions as Android users. And that's not an accident — it's by design. Luna: That makes the hardware almost like a loss leader, except it's not a loss — it's still very profitable. Lucas: Exactly. But let's go back to the beginning. When the first iPhone launched in 2007, it was priced at 499 dollars for the 4 gigabyte model, and 599 for the 8 gigabyte. That was a lot of money for a phone back then. The average phone cost maybe 200 dollars. But Apple priced it as a premium device from day one. And Steve Jobs famously said, 'We don't ship junk.' That set the expectation: you pay more, you get more. Luna: And they had to make that work despite the fact that early iPhones were pretty limited — no copy and paste, no third-party apps. Lucas: Right, but the hardware and the interface were so far ahead that people accepted it. And Apple has been very disciplined about not discounting. You almost never see iPhones on sale — even through carriers. They control the price tightly. That preserves the brand's premium perception. Luna: So what happens if a competitor tries to undercut them? Samsung, for example, often prices its flagships below the iPhone. Lucas: Apple doesn't respond. They let Samsung have the lower price point. And what you see is that Samsung's profit margin on phones is much thinner — maybe 10 to 15 percent on average — while Apple captures over 80 percent of the global smartphone profit. So they're not competing on price; they're competing on perceived value. And that's a much stronger position. Luna: But there's a risk, right? If the price gets too high, even loyal customers might balk. Do we have any evidence that Apple is hitting a ceiling? Lucas: There's some data. In 2023, when iPhone sales dipped slightly, there was talk that the Pro Max at 1,199 dollars was just too much for some people. But Apple's response wasn't to cut prices — it was to introduce the iPhone SE at 429 dollars to capture the lower end. That way, the premium brand stays intact, but you have an entry point. And the SE still has a decent margin — maybe 40 percent — because it uses older components. Luna: So it's like a price umbrella. Apple sets the high bar, and everyone else sits underneath. Lucas: That's a great way to put it. And the umbrella has been remarkably consistent. If you adjust for inflation, the original iPhone 8 gig model would be about 900 dollars today. So the iPhone 17 Pro at 1,099 isn't actually that much more expensive — it's just that the price has stayed high while the product has gotten exponentially better. Luna: So what's the one lesson a business owner should take from Apple's pricing strategy? Something they could actually apply. Lucas: I'd say it's this: don't compete on price. Compete on perceived value. Apple doesn't try to be the cheapest — they try to make their product feel indispensable. And they do it through design, ecosystem, and a pricing structure that gives you clear choices. If you're building a product, think about how you can create tiers that make the higher-priced option feel like a no-brainer, not a luxury. Luna: And maybe resist the urge to discount. Once you start, it's hard to stop. Lucas: Exactly. Apple's pricing power isn't magic. It's a consistent, long-term strategy that prioritizes margin over volume. And it's made them the most valuable company in the world.