What’s Behind iPhone 5 Price Cuts?

What's Hot

2 Types of Black Marks Might Vanish From Your Credit File SoonBorrow

6 Ways the Obamacare Overhaul Might Impact Your WalletInsurance

7 Dumb and Costly Moves Homebuyers MakeBorrow

This Free Software Brings Old Laptops Back to LifeMore

Obamacare Replacement Plan Gets ‘F’ Rating from Consumer ReportsFamily

Beware These 12 Common Money MistakesCredit & Debt

21 Restaurants Offering Free Food Right NowSaving Money

17 Ways to Have More Fun for Less MoneySave

House Hunters: Beware of These 6 Mortgage MistakesBorrow

30 Household Uses for Baby OilSave

25 Ways to Spend Less on FoodMore

Nearly Half of Heart-Related Deaths Linked to These 10 Foods and IngredientsFamily

5 Surprising Benefits of Exercising Outdoors in WinterFamily

10 Ways to Save When You’re Making Minimum WageSave

Boost Your Credit Score Fast With These 7 MovesCredit & Debt

7 Painless Ways to Pay Off Your Mortgage Years EarlierBorrow

The Most Sinful City in the U.S. Is … (Hint: It’s Not Vegas)Family

The True Cost of Bad CreditCredit & Debt

10 Companies With the Best 401(k) PlansGrow

This Scam Now Tops ID Theft as the No. 2 Consumer ComplaintFamily

6 Stores With Awesome Reward ProgramsFamily

6 Ways to Save More at Lowe’s and The Home DepotSave

6 Healthful Treats for Your DogFamily

New Study Ranks the Best States in the U.S.Family

Thousands of Millionaires Moving to 1 Country — and Leaving AnotherGrow

Strapped for College Costs? How to Get the Most From FAFSABorrow

6 Overlooked Ways to Save at Chick-fil-AFamily

Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?Borrow

Where to Sell Your Stuff for Top DollarAround The House

8 Ways to Get a Good Price on a Shiny New AutoCars

Ask Stacy: How Do I Start Over?Credit & Debt

Secret Cell Plans: Savings Verizon, AT&T, T-Mobile and Sprint Don’t Want You to Know AboutFamily

30 Awesome Things to Do in RetirementCollege

14 Super Smart Ways to Save on TravelSave

The Rich Prefer Modest Cars — Should You Join Them?Cars

You’ll Soon Pay More to Shop at CostcoSave

10 Ways to Save When Your Teen Starts DrivingFamily

iPhone 5 prices have reached a new low. But what's behind all the discounts and how can shoppers take advantage?

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.

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!


Read Next: Costco Releases Dozens of New Deals

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 2,023 more deals!