Apple earns billions of dollars in profits from all its products, but the iPhone stands out year after year. In their Q1 2016 financial results, Apple reported revenue of 51.6 Billion just from the iPhone, which is marginally up from the last year's results. The fact is, Apple earns an insane 50%-70% profit off selling each iPhone unit. Naturally, the question arises: is the iPhone overpriced?
Part 1: The Cost of R&D and Manufacturing
Although phone components are becoming cheaper day by day, Apple tries to keep the technology inside the iPhone the best and the latest. IHS did a tear-down of Apple's latest iPhone, the iPhone 6S Plus, and reported the following costs of purchasing components and production:
Total component costs: $231.50
Total manufacturing and testing cost: $4.50
Thus, the total cost of producing one 16GB iPhone 6S Plus is just $236. But this phone is sold at $749.
Now, Apple also puts in billions of dollars every year for research and development. So let us add $25 to each iPhone's manufacturing cost that adds up to the R&D cost. Also, let us add another $45 for software development and other internal costs. That allows for a total cost of iPhone to be about $306, which is still a full $443 away from the actual selling price.
This (highly) approximate calculation of the total cost of an iPhone clearly shows that the iPhone is overpriced - by a large margin. But that doesn't stop customers purchasing the iPhone...
Part 2: The Experience
When Jobs introduced the iPhone, he introduced a new era in pocket computing. The iPhone is a revolutionary product for the company and for the world, bringing in an all new user experience that has only improved in the last decade.
The iPhone experience is unparalleled, thanks to its simplicity of use, advanced, unique features and top-notch hardware and software. In fact, the greatest justification of the price of the iPhone is the seamless integration of iOS with the phone's hardware, and the iPhone with the rest of Apple's products. The iPhone runs on almost half the specs of a good Android phone, while still performing better and lasting longer (as with software updates) than any Android phone. Moreover, the iPhone popularised certain features in common in today's smartphones, like the voice assistant (with Siri), the fingerprint sensor (with TouchID) and of course, the pressure sensitive display (with 3D Touch).
iOS, too, adds a lot to the iPhone experience. App developers often release iOS versions before heading to Android. The quality of apps on the App Store is said to be significantly better than the quality of apps on the Play Store, partly due to the developer tools and ecosystem, and partly because Apple checks every app before it gets published onto the store. This system of checks also makes the iPhone far safer than any other phone in the market. iOS features like Handoff, AirPlay and iCloud Photo Library makes the iPhone work beautifully well with other Apple products, and can be a convincing reason for the purchase of an iPhone.
I've seen my friends accept that once you move to the iPhone, you would probably upgrade only to another iPhone. A report by RBC Capital Markets from June 2015 shows that 83.4% of iPhone users will purchase an iPhone as their next phone. This customer loyalty is exclusive to Apple.
The iPhone will continue to sell in large numbers albeit the price. The reputation of Apple in the smartphone space, the brand loyalty and their passion for sprinkling something new (although not necessarily revolutionary) in every release of the iPhone is going to keep Apple ahead of the curve.
Is the iPhone overpriced? It is a relative question. If you are a practical headed person, you simply won't agree to the ridiculously high price of the iPhone. On the bright side, however, you are buying more than just a phone - you are paying for an experience many in the world crave for and love.
Practically speaking, the iPhone relatively doesn't cost so much more. Take, for example, the Samsung Galaxy S6 Edge, which costs about $275 to manufacture but is sold at a price far greater than that. This is the case with almost all phone manufacturers, with the top-end flagship smartphone lying in the premium price range.
As the Apple fans say, "an iPhone is an iPhone".
iPhone 6S Plus price breakdown: IHS/Digital Trends | Apple R&D spending: Above Avalon | Apple Q1 2016 financial results | Apple customer loyalty: Cult of Mac/RBC Capital Markets | Galaxy S6 Edge price breakdown: IHS