What’s Behind iPhone 5 Price Cuts?

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This article by Jeff Somogyi comes from partner site DealNews.

Walmart announced it would drop its price on the iPhone 5 by $72, knocking it to $127 through the second week of January. The promotion might be in-store only, but it’s an attractive deal for anyone who thought its original $199 retail price was high. More shocking? Two days after the retailer made this buzzworthy price cut, another merchant got in on the game; Fry’s Electronics actually one-upped Walmart (literally) by discounting the iPhone 5 $1 more, dropping it to $126.

These deals are admittedly impressive for the consumer, but the tit-for-tat discounts highlight an interesting fact about the iPhone 5: As far as current-generation Apple smartphones go, it’s the most highly discounted of the lot. In the lead-up to Christmas, the iPhone 5 has been discounted on seven occasions, whereas last year’s current-gen Apple offering — the iPhone 4S — saw only two deals during the same time frame. That’s 3.5 times more for the iPhone 5.

Typically, we see few and modest discounts on the latest smartphones from Apple; the biggest price cuts come when a new generation is released resulting in the retail price of previous generations being cut. So why, all of a sudden, is all this discounting happening?

iPhone 5 discounts as a result of lagging sales?

Andy Hargreaves of Pacific Crest believes that “a combination of market saturation, weak global demand, and incremental innovation that has surpassed consumer demand are likely negatively impacting iPhone sell-through,” as reported by Wired. Hargreaves’ reasoning, then, is that the iPhone 5 is not selling well enough, so Walmart has decided to discount it. This may seem substantiated by the numerous reports that suggest iPhone 5 sales have come in well under expectations.

However, Walmart doesn’t make much money on each iPhone sold anyway. Typically, phones are significantly subsidized by the service provider, which eats the cost of the device because it happily locks consumers into an expensive two-year contract. In that sense, Walmart was never making a profit from the device itself. Moreover, while sales figures may not be as astronomically high as we’re accustomed to seeing for the latest iPhones, it’s fairly certain that the iPhone 5 will still continue to sell steadily for the next six months until a newer version comes out. In fact, some analysts have publicly mocked the doom-and-gloom analyses of iPhone sales. “Samsung, HTC, Nokia, LG, and other manufacturers may be chewing up some market share, but for many consumers there is no substitute for the iPhone,” says Mike Rose, Lead Editor at The Unofficial Apple Weblog.

Retailers are using the iPhone 5 as a doorbusting loss-leader

The key to understanding the myriad of iPhone 5 discounts is this: Five of the seven iPhone 5 deals we posted, including Walmart’s, were for in-store purchase only. (That number ratchets up to six, if you count a Best Buy sale in which only some models were available with shipping.) In each case, the retailer corrals customers into stores, presumably eating the additional costs of subsidization in the hopes that customers will make unplanned purchases while there — and potentially on items that actually feature a favorable profit margin.

Thus, iPhone 5 sales are essentially doorbusters, akin to those we see on Black Friday. The relationship is paralleled even more when you consider the fact that many shoppers have reportedly had a difficult time actually finding the Walmart phones to begin with. If you’re one of the consumers who tried to snatch up one of those “only 10 in stock” TVs on Black Friday, this scenario perhaps sounds familiar.

So, with Apple’s blessing, Walmart decided to go all-out and make the iPhone 5 ridiculously attractive to consumers, who will come to the store to buy it, and hopefully some other stuff while they’re there — even if the phone is nowhere to be found. It’s possible, too, that some consumers, knowing that the iPhone promotion will be going on through mid-January, will even return to Walmart again in the hopes of catching the iPhone 5 in stock. (Now that is how to turn a loss-leader into profit!) And these days, when one retailer makes such an attention-getting promotion, many others follow suit, hence Fry’s Electronics’ Price Is Right move.

Apple is on board with massive cuts to promote the iPhone 5 over the 4S

The question still remains, however, as to why Apple finally decided to sign off on such significant price cuts to its product, after years of notoriously shrewd pricing. TUAW’s Rose believes it may be partially spurred by the competition that the iPhone 5 faces from its brethren, the iPhone 4S.

“The presence of the iPhone 4S (and to a lesser degree the iPhone 4) in the product lineup has had a substantial effect on Apple’s sales mix and average selling price for iPhones,” says Rose. “[But] Apple makes more on the sale of each 5 than it does on each 4S.” Moreover, shepherding consumers over to the latest iPhone creates a greater market for the Lightning dock’s accessories. “Shifting the market to the new connector means more accessory sales and more vendors making gear that works with the 5,” Rose says.

Regardless of why Apple has endorsed these fire sale prices, iPhone 5-coveting customers stand to benefit – if they can find the iPhone deal in stock in the first place, that is.

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