Products tend to have a tendency to come down in price over time. This is mainly due to two reasons. One, because a new product will replace it, causing demand to lower, and two, the technology becomes cheaper to manufacture when sold in large bulk (it costs X dollars to design the product, Y dollars in parts and assembly, and Z dollars in building or converting factory lines to produce the goods. Over time, X and Z will be a one-time large payment, why Y, the cost of just building the product with no new engineering and no new factories, remains a lower constant.) Therefore, given a year of sales, a smartphone will typically drop in price to promote the sale of its remaining stock, in preparation of the newest, latest and greatest smartphone to roll off the fresh assembly line.
In terms of price, there are many things to consider when determining the price of a smartphone. In fact, it gets so complicated, that I would honestly hate being the head of a company such as Samsung. The reason being, there's just so many things to analyze. Take this example:
A Samsung Galaxy S6 costs $650. It costs $275 in parts to build the phone (fact). It costs $500 million to design the S6. It also costs $45 million in advertising each year. So, in all, it costs around $550 million to make a Galaxy S6, and $350 to sell a phone (boxes, shipping, etc). So to break even, if Samsung made $100 on each phone, selling it at $650, then they would need to sell 1.83 million phones to break even. Not too shabby. BUT STOP!!
Before you start getting too excited, remember several things. One, most phones are sold through the carriers, which means the companies such as US Cellular or Verizon are taking a chunk of that profit for themselves. Next, and this is a big one, is software updates and going through the FCC. The Federal Communication Commission is like the devil to smartphone makers, but its in place to make sure manufacturers of gadgets follow rules, such as radiation transmittance of smartphones. So yay to safety! But a revise from the FCC saying,"Hey, Samsung! Whatcha doing, this doesn't pass our rules!" results in HUGE, expensive revises in the product, and then whole new stages of product testing after the software teams rework things for different hardware changes. Anyone that is an engineer is able to vouch how returning to the drawing board can slow things down and rack up expenses. Then, there is this thing called long-term support. It costs millions upon millions each year to deliver software updates to phones, up to 2-3 years after they have been released. This requires hiring a team of engineers dedicated to a 2 year phone to release software updates that take months to implement and test, and then requires sending to the phone carriers such a Verizon for them to test, and sending to Google to verify that it is allowed to be rolled out. Again, this can result in being sent back to that dreadful drawing board. Also, phones break, its a fact. So if a phone fails within 1 year, Samsung has to pay to fix that device for free if it is found to be a manufacturing fault.
So lets take a big step back. Remember that $275 in parts and assembly costs of the phone? And that $650 price tag? Yeah, its there for a reason, and while it is higher than it should be for profit reasons, it is not just a 225% markup for nothing. There are other costs associated with the product.
But this brings me to the question of this article? What should the price of a smartphone be? How is it determined? For example, Samsung could sell the S6 at $375 and make $25 profit! Would this not lead to increased sales, and then increased profit? Well, no, sadly. This $25 profit would be 8% of the profit they made earlier, so they would have to sell 12 times as many phones to make the same amount of profit! If they didn't sell 12 times the phones, which, mind you, would actually require 12 times as many assembly plants, so even if there were enough people to buy the phone, Samsung would go broke trying to build enough (and there are barely enough people on this planet to buy that many). So to keep investors happy, and to not sink and crush Samsung's quarterly/annual profits, Samsung cannot lower their price to $375. However, they could go and stop advertising their phones, which would reduct the cost of making a phone by a few bucks...but then, would anyone buy the phone? Or should they put more technology into the phone to try to sell it in a better way with propaganda? Or reduce useless features to save a few bucks? Leading into that, should they make their phone as thin as the iPhone, or make it a few more mm thicker to beat the battery life of iPhone? Will consumers even care, or will they just continue to buy the iPhone? Also, if Samsung were to lower the cost of their smartphone lower than the iPhone, would less people buy it because people see Samsung as a "cheap" brand and the expensive brands as a nice luxury?
So many decisions....so, then, what should the cost of a smartphone be? Well, several companies such as Huawei, Motorola(known as Lenovo as of 2016), Xiaomi, Asus, and OnePlus, have decided to sell phones near market cost in large bulk, to try to change these logistics. They all commonly have very aggressive budgets, and only make small margins off of each phone in comparison to Apple. Motorola sells their flagship phone for an insane $400, Asus sells theirs for $300. OnePlus for $370, Huawei for $450, and so on. The pattern is, they all sell for anywhere from 1/2 off or more from their more expensive counterparts, and almost each brand has a phone that is even more cheaper that still offer great performance and great specs. However, there are companies like Blu, an American company, that sells phones cheaper than all of the others, with smartphones ranging from $60-$200! Yes, I could go out and buy 11 of Blu's cheapest smartphone, or one Samsung Galaxy S6! Now, granted the $60 phone is not ideal for photo taking or up-to-date software or gaming, but is actually functional and can browse the web, etc, is quite amazing to me. My guess is that they make maybe $3 off the device, as Amazon still needs to make their profit share off of that $60! Razor thin margins indeed.
So what should smartphones be priced at? Well, that is tough, because inexpensive smartphones come off as "cheap", while expensive phones like the iPhone come off as luxury, something to pay a premium for. And if everyone sells their phones at low, razor-thin margins, they will all go broke, as people will still buy the iPhone. Apple is the name-brand, and all others priced below it are cheap, and all others priced above it are overpriced stupidly. In the end, I believe Apple dictates the prices of smartphones, and as long as they own the majority in the US, it will stay that way.
-1228 words
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