When Apple (NASDAQ: AAPL) launched Apple Watch in 2015, it included a premium line called Apple Watch Edition, which was priced at an astronomical $10,000 to $17,000 and featured a case made of gold. Considering the fact that the premium pricing only related to the case material and aesthetics, and no performance improvements like a faster processor or more storage, it was a bold experiment to see how much consumers would pay for a high-end smartwatch. While many classic watches sell for far more than that, those timepieces don't become obsolete within a few years because of software updates.
The Mac maker quickly and quietly discontinued the gold edition in 2016, shifting to a ceramic case for Apple Watch Edition. This year? Apple Watch Edition is no more.
The stainless steel Apple Watch Series 4 with a gold finish. Image source: Apple.
Aluminum or stainless steel only
With this year's unveiling, Apple has now discontinued its Apple Watch Edition lineup entirely, consolidating its material choices to just aluminum and stainless steel. The decision strongly implies that the ceramic models (or the gold that came before it) did not command the level of unit volume that would warrant new iterations. The process that Apple used to make the ceramic cases was rather complex and presumably costly, and operating leverage requires production to scale in order to spread out those costs.
Instead of focusing on the case material, Apple is now relying on adding new features -- like an EKG monitor -- to justify price increases. That's a more reliable playbook, as mainstream consumers are generally more willing to pay for greater functionality instead of just aesthetic differences. Besides, the stainless steel Apple Watch models are now available in a gold finish for gold enthusiasts like my fellow Fool Ashraf Eassa.
A different pricing power tool
That's not to say that Apple has abandoned a premium pricing strategy with Apple Watch. Rather, the company is now leaning heavily on its partnership with luxury fashion brand Hermes to justify higher prices. This is a clever move for a few reasons.
Apple Watch Hermes. Image source: Apple.
Apple Watch Hermes models use the same stainless steel cases, with the chief differentiators being Hermes-branded leather bands and exclusive watch faces. Watch faces are merely software, which means Apple incurs negligible development costs with a design that can be easily distributed at scale. Apple Watch Hermes starts at $1,400, or twice the $700 that stainless steel Series 4 models start at.
Seeing as how a leather band is far cheaper than a gold case, transitioning to this strategy bodes well for Apple Watch margins. Farewell, Apple Watch Edition.
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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.