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  • In 2016, the iPhone 7 started at $649.

  • Three years later, Apple's flagship iPhone

  • cost 54% more.

  • It's even more dramatic for the Mac Mini.

  • When Apple released its new model,

  • the price increased by 60%.

  • These prices bring in huge profits for Apple.

  • As the US's first trillion-dollar company,

  • Apple's market cap is higher than the GDP of Switzerland.

  • So what makes Apple products so expensive?

  • Mohan Sawhney: Apple has, over the years,

  • built a reputation for quality

  • and the industrial design of its products.

  • Narrator: That reputation has created

  • millions of loyal customers.

  • Marco Pierre White Jr.: I've been here about 36 hours now.

  • Man, I'm super excited, I'm not even going to lie.

  • Can't wait to get my hands on mine.

  • It's only 1,000 pounds, man. Eh.

  • I'm probably getting two, man!

  • Sawhney: So that brand loyalty translates into a premium

  • that they're able to extract from customers

  • who are unwilling to switch out of the Apple ecosystem.

  • Narrator: That premium is also known as the "Apple tax,"

  • or paying more simply because it's an Apple product.

  • The 256 GB MacBook Air, for example,

  • costs $1,299,

  • but you can get a more powerful Windows laptop

  • for over $100 less.

  • Apple's high prices reached meme proportions

  • during the announcement of its Mac Pro in June 2019.

  • Claps turned to gasps when John Ternus unveiled

  • a $1,000 monitor stand as an add-on

  • for the $5,000 Mac Pro display.

  • John Ternus: And the Pro Stand: $999.

  • And like the Mac Pro, they'll all be available in the fall.

  • Narrator: In truth, $6,000 for a professional

  • reference monitor of this quality

  • is comparable to the competition,

  • but that didn't matter.

  • Apple had botched the messaging,

  • and its $1,000 stand became infamous.

  • Sawhney: Apple does something else that's a bit sneaky,

  • which is that when you're buying the iPhone,

  • you can't add memory to it.

  • So if you want more memory,

  • you have to pay more Apple tax.

  • Narrator: With Apple's computers, these upgrades

  • get even more expensive.

  • If you want a 13-inch MacBook Pro

  • with 512 GB of storage,

  • you have to pay $400 more than the base model.

  • And Apple's accessories also have high premiums

  • compared to non-Apple products.

  • Like its $129 keyboard

  • or its $79 mouse.

  • Even Apple's cables cost more.

  • Apple has kept its proprietary lightning connector

  • while removing useful ports,

  • like the headphone jack and the SD card reader,

  • forcing consumers to buy expensive dongles

  • like its $39 SD-card-to-USB-C reader.

  • But are these products worth the premium?

  • Apple loves to talk about its innovation.

  • Narrator: And iPhones have added great features,

  • like OLED displays, faster processors, and thin bezels,

  • but competing products have many of the same features.

  • Sawhney: The components that go into making

  • a smartphone are fairly standardized.

  • For example,

  • Sony competes with Apple in smartphones,

  • but all of the camera sensors that go into an iPhone

  • are made by Sony.

  • Narrator: And those components cost a lot less

  • than a new iPhone.

  • Sawhney: The bill of materials is about $490

  • for a phone that is priced at $1,099.

  • As a comparison point, the Galaxy S10 Plus

  • is about $420 below materials

  • for a price of $999.

  • Narrator: Something changed when Apple

  • released the iPhone 10.

  • Not only was it more expensive, but the difference

  • between the bill of materials and the retail cost

  • was much greater.

  • Obviously, Apple wants to make a profit,

  • so the bill of materials has to cost less than the device.

  • What makes Apple special is its ability

  • to pull larger profits than its competitors.

  • Instead of a technology company,

  • think of Apple as a luxury brand.

  • As with Gucci or Hermès, customers pay more

  • because the logo is a status symbol.

  • That handbag isn't a more functional bag,

  • but customers still value it more.

  • Sawhney: So, all our products become an extension

  • of our personality. "I value elegance, I value design,

  • I value simplicity, I value, 'It just works.'"

  • And that is what inspires a lot of loyalty

  • and allows Apple to extract a premium for their products.

  • Why are Apple products so expensive?

  • 'Cause the design's very sleek.

  • I think because they make premium hardware

  • and people are willing to pay

  • for a simple, seamless experience.

  • They're catering to people that really love

  • ease of use and user-friendliness,

  • and I think that probably

  • that layer of design probably costs a little bit,

  • and I'm happy to pay for it.

  • They are expensive because

  • they know we will buy all of their things

  • no matter how expensive it is.

  • Samsung,

  • Android,

  • Apple, thank you.

  • Sawhney: I think that customer loyalty is hard to earn,

  • but when you do earn the customer loyalty,

  • love is blind.

  • Narrator: But this strategy might not work forever.

  • Competition with less-expensive Android phones

  • has gotten steeper,

  • and that's put the iPhone's market share at risk.

  • Sawhney: Apple's performance in India is pathetic.

  • Pathetic to the point that their market share

  • has now slipped to less than 2%,

  • has become completely irrelevant,

  • and the primary reason there is that the price points

  • are simply unaffordable for the Indian market.

  • Narrator: If Apple can't sell more iPhones,

  • it might have to sell fewer iPhones for more money.

  • Charging a premium allows Apple to keep

  • increasing its revenue,

  • even if its biggest category,

  • the iPhone, is declining.

  • Sawhney: See, whenever you create a new product,

  • what you want to do is to extract all of the

  • premium that you can from the higher-end customers,

  • people who are willing to pay a premium.

  • Narrator: That means the customers who buy the iPad Pro

  • or the $5,000 iMac Pro.

  • Apple does offer cheaper models,

  • like the iPhone 11

  • or the 11-inch iPad,

  • but those aren't always the models customers choose.

  • Sawhney: This is called extremeness aversion,

  • because you don't want to buy the cheapest,

  • you don't want to buy the most expensive,

  • so the middle one looks like a compromise.

  • Narrator: But Mohan pointed out that Apple

  • has a disadvantage compared to true luxury brands.

  • Sawhney: A luxury product is like a Rolex, right,

  • that you'd keep it for a lifetime.

  • Well, you can't keep a smartphone for a lifetime.

  • So, premium. Perhaps not luxury.

  • Narrator: For now, Apple's reputation remains strong.

  • And the customers who don't want to spend

  • $1,000 on a new phone?

  • Apple has a plan for that.

  • Keep the old models around,

  • just at a very slight discount.

  • But if Apple wants to keep its loyal customers,

  • its innovation will have to keep pace with its premiums.

In 2016, the iPhone 7 started at $649.

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