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Why Apple's iPhone Xr Pricing Makes Sense

Ashraf Eassa, The Motley Fool

It had long been known that Apple (NASDAQ: AAPL) would launch a more cost-effective iPhone at its September event, alongside its more premium iPhone Xs and iPhone Xs Max. But the actual pricing of that device -- officially called the iPhone Xr -- remained a source of significant speculation. Ahead of the launch, one analyst predicted that the phone would start at $849 "with some flexibility down to $800" -- something that I disagreed with.

Apple ultimately priced the devices at $749 for the version with 64GB of storage, $799 for the 128GB model, and $899 for the 256GB variant. Here's why this pricing makes sense.

A blue iPhone Xr displaying a 3D game.

Image source: Apple.

Consider iPhone Xr's market position

Recall that Apple introduced three new iPhones last year: iPhone 8 (starting at $699), iPhone 8 Plus (starting at $799), and iPhone X (starting at $999). The successor to the iPhone X, called the iPhone Xs, will start at that same $999 price tag and its larger sibling, the iPhone Xs Max, will start at $1,099. What this means from a product stack perspective is that the iPhone Xr is a de facto replacement for both the iPhone 8 and iPhone 8 Plus.

Consider also that Apple tends to discount its previous iPhones as it takes advantage of the fact that manufacturing costs of a product tend to come down over time. Apple dutifully followed that playbook this year, lowering the prices of the entry-level iPhone 8 and iPhone 8 Plus models by $100 each to $599 and $699, respectively. 

So, in light of the fact that the iPhone Xr is a replacement for the iPhone 8 and iPhone 8 Plus, and considering that the iPhone 8 and iPhone 8 Plus each got bumped down the company's product stack, the $749 starting price point for the iPhone Xr looks reasonable. It's priced at the average of the starting prices of the iPhone 8 and iPhone 8 Plus when they were new and it's slightly more expensive than the now-discounted iPhone 8 Plus with the same storage configuration.

Value relative to the older iPhone 8/8 Plus

One thing that could potentially be a positive for iPhone average selling prices is that the iPhone Xr seems to better justify the increased price over the older discounted iPhone 8 series models than the iPhone 8 series did over their iPhone 7 series counterparts at the launch last year.

The iPhone Xr has a new form factor relative to the iPhone 8, with a dramatically improved screen-to-body ratio thanks to the use of the company's Face ID technology (allowing it to eliminate the large bottom bezel that it needed to house the home button and fingerprint scanner), as well as a new edge-to-edge liquid crystal display (LCD) that the company markets as a "Liquid Retina HD display."

By contrast, the iPhone 8 series devices looked quite similar to their predecessors and didn't introduce any big changes to how the devices were used relative to the iPhone 7 series.

Simply put, the iPhone Xr seems like a bigger aesthetic and user experience leap over the iPhone 8 than the iPhone 8 was over the iPhone 7. This could lead to customers that might have chosen the iPhone 7 over the iPhone 8 in previous generations opting for the iPhone Xr instead of the iPhone 8 or even the iPhone 8 Plus during this product cycle. To the extent that Apple's customers do that, iPhone average selling prices should benefit.

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Ashraf Eassa has no position in any of the stocks mentioned. 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.