Pricing the iPhone 5C

At this point, both the name and very existence of the iPhone 5C are still technically rumors, but where there’s smoke, there’s fire—and in this case we can all see the flames burning holes through the shroud as well. So how much is this thing going to cost?

I think the best way to answer this question is to first ask why Apple decided to build it. For the previous six versions, every new iPhone has been the “best iPhone ever.” Their strategy for offering a budget model has been to keep around the previous two generations at a discount, gradually phasing them after three years. In the United States, these three lines are sold with subsidized contracts, at affordable $199/$99/$0 price tiers (for 16 gigabyte models). This has led to the iPhone becoming the most popular phone in America, and a fair number of other countries as well.

But it’s not enough.

There are billions of phone users with far lower discretionary spending and who use only prepaid plans. The current US prices for these same three tiers (we’ll later see how these compare internationally) are $649, $549, and $450. Even in the affluent West, these prices are limiting; in most of the world, these prices are hopelessly out of reach.

Apple isn’t going to try to make the iPhone into something that’s affordable for absolutely everybody, but it’s obvious that they would like to greatly expand the addressable market.

Let’s step away from the pricing, for a moment, to consider what we know about the iPhone 5C. It’s plastic, of course, but also has a 4-inch screen and Lightning connector, both of which position is as a more-premium alternative to the iPhone 4 and 4S. Why not keep the screen at 3.5 inches to better segregate the product lines? One of the iPhone’s strengths is its consistency as a platform. If the entire purpose of the iPhone 5C is to drastically increase global market share, it seems clear that this mass influx of new users should be using the newly established standard of 4 inches and the more durable (i.e. cheaper warranty costs) Lightning connector. As for other internals, those require more speculation, since theres no hard evidence, but Apple will likely establish a new minimum baseline of something comparable to the current iPhone 5, though they can shave costs by using a lesser camera, and skipping the in-cell touch technology that helps make the current iPhone 5 so thin.

Going off Apple’s previous strategy, we could expect the iPhone 4S to move into the free-on-contract tier in September, while the 5 becomes $99 and the new 5S becomes the $199 flagship. Instead, the iPhone 5C will replace the 4S, discontinuing that body-style a year earlier than “normal,” and selling for “free” in America. But what about the rest of the world?

If the unlocked price of the iPhone 5C were $450, then the whole product would have no purpose; they could have just continued selling the 4S, right? So how much cheaper does it go? In the United States, I think they might go for $399. It’s enough to preserve margins, but still grab more of the pre-paid market. Pre-paid is even more popular in Europe, and I’d expect them to stick with a comparable price, adjusted to account for VAT.

So what about China? This is where it gets interesting. Despite selling for $649 unlocked in America, the iPhone is actually much more expensive in China. The 16 gigabyte model is 5,288 RMB. Exchange rates vary constantly, of course, but this is currently more than $850. While the average wages in China are much lower than in the West, it’s a big enough country to still have a large number of very rich (and very brand-conscious) consumers. Come later this year, these consumers can continue to spend $850 on the wildly-profitable brand-new iPhone 5S. The champagne-gold color even lets others know that they have the newest model. The aspirational middle class who can’t afford that much can instead enjoy the still-prestigious iPhone 5C … for $400.

Apple doesn’t need to make a “cheap” iPhone to greatly expand their market share in China; they just need to make a cheaper iPhone. The current cheapest iPhone in China is the 8 gigabyte iPhone 4, which retails for around $500 (3,088 RMB). Chinese consumers will be able to buy a current-generation model for fully $450 less than their option today.

What happens next year? There’s never been two, new iPhones at the same time, so there’s never been two year-old iPhones at the same time. Will they keep the current 5C as-is and drop the price? My alternate pricing theory is that Apple decides to go slightly less aggressive this year, and prices the 5C in China at $450, which is still $50 less than the current low-end price. A year from now, they can drop it all the way down to $350, and really go for market share.