For the last few days John Gruber at Daring Fireball has been ranting about iSuppli’s estimate for Apple’s iPhone cost of goods. He appears to be more than a little confused, as is the point that he is trying to make. Is John’s outrage based on the 55% margin ? That other people are outraged at this margin ? That he does not think Apple could have a 55% margin (on cost of goods) ? Or, is it that he does not like iSuppli’s $7.00 for OS X (he thinks it should be more ? What ?) What I think it comes down to is a failure to understand is that iSuppli and Portelligent estimates are for ‘cost of goods’ and that the gross margin they quote is a gross margin on that cost of goods. The actual cost of a product is made up of the cost of goods (components) plus shipping, marketing, development costs, support etc. In coming up with an estimate for what it cost to build a product these other costs are never factored in. How could they ? They are both variable, and unknowable. Historically Apple has tried to keep a gross margin on the cost of goods required to build a product at 50%. This is not unusual, and I have worked for companies that aimed for 5% cost of goods relative to the sale price. That does not equate to a 95% gross margin, as research and development costs can often be huge, as can marketing costs, and even with those margins it is possible to lose money on each unit sold. Apples historical average 27% gross margin, is not on the cost of goods required to build any one product, but the gross margin across the line of hardware and software after all development, support, marketing, depreciation etc have been factored in. The gross margin on any one product is not the same as a companies overall gross margin. Typically products are priced according to what the market will bear, not how much they cost to produce. Monster Cable for example has built an incredibly successful business on selling cables that cost a few dollars to produce for what many people feel are ridiculous prices. (A pair of Monsters top of the line 15ft speaker cables retail for $850.) Often the same product is sold in different countries for different prices. Historically almost everything is more expensive in Europe than the US. A pair of Levi’s 501’s is £60 ($120) in the UK (levis.co.uk). The same pair of jeans goes for $46 on levis.com in the US. Similarly Apple products are always been more expensive in Europe than the US. Why ? Because the market will bear it. Apple set the price of the iPhone at $499 for the 4GB and $599 for the 8GB model. These prices are totally artificial, and could quite possibly be several hundred dollars lower. They are based on what Apple believes people are willing to pay for the product, and they were correct. Hundreds of thousands of people have happily handed over their credit cards, and the majority of phones sold have actually been the more expensive $600 model. Why ? Because people could afford it however much outrage is voiced. People believe that they are getting value out of their purchase, in the same way that Mac users have historically paid a premium for their computers over their windows counterparts. They feel like that premium is buying them something, and it is. It is buying a different way of doing things. A way that some people value and are prepared to pay more for. Are they right or wrong ? There is no right and wrong. There is only acceptable and unacceptable, and these are very personal determinations.
