Question: I was having a conversation yesterday about how, in technology, costs have dropped over time — think big-screen TVs and laptops/computers. But one place the opposite has occurred is in the cellphone market. Production costs have dropped, but the retail price goes up for many brands. This likely is driven by the market (people willing to pay $1,000 for a phone that arguably may do less than a cheaper laptop), but is that a good enough — and ethical — reason to charge that price? I don’t know if that’s a question of “ethics in pricing” (I’m still new!), but figured I’d throw it out there. Andrea
Answer: Thanks for the question, Andrea. I’m going to answer in two parts.
First, I think your premise is not quite right. The prices of cell phones have been dropping. We can see this in two different ways. In 1982, the Motorola DynaTAC sold for $3,995. Pretty pricey. But that’s not what you’re thinking.
How’s this? I just looked on the Apple website and you can buy an iPhone 7 for $449. When it was released in 2016 it sold for $649. Definitely price decreases.
Finally, I looked up Apple’s margins on iPhones. The iPhone X margin is about 64%. However, the iPhone 5, 5s, and 6 had about 69% margins. Apple is using a smaller markup now than they used to.
Well, the prices of TVs are coming down, aren’t they? I just looked on Best Buy’s website. You can buy a Samsung QLED 85″ TV for only $15,000. Pretty expensive. It didn’t exist before. I’m guessing you are comparing a 50″ 4K TV from two years ago to a 50″ 4K TV today. That’s like comparing the price of the iPhone 7 from two years ago to the price of the iPhone 7 today.
The first point then is to push back a little on the premise that prices aren’t going down.
The second point, is it ethical? I will say absolutely YES! In this case, Apple is offering us a capability that wasn’t available before. They are giving us a choice we didn’t have. We don’t have to buy it. The iPhone 7 works well. However, the people who want (need?) the latest and greatest can get satisfaction.
I would probably answer this question differently if we were talking about medical products instead of cell phones. Cell phones are not life or death (regardless of what your teenager thinks). The ethics of pricing medicine is much more complex. Thanks for not asking that one. 🙂
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.