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Don't Expect Apple's 6.1-inch LCD iPhone to Be This Expensive

Ashraf Eassa, The Motley Fool

On Sept. 12, Apple (NASDAQ: AAPL) is expected to unveil a trio of new iPhones. That lineup is said to consist of a successor to the iPhone X (reportedly called the iPhone XS or Xs), a larger version of that device (which 9to5Mac says might be called iPhone Xs Max), as well as a lower-cost model that won't have all of the bells and whistles of the higher-end model.

There's been plenty of debate as to how Apple will price that lower-cost model. TF Securities analyst Ming-Chi Kuo estimates that the phone will cost between $600 and $699, while Goldman Sachs analyst Rod Hall thinks that it'll start at $849 with "some flexibility for the iPhone 9."

Four iPhone X smartphones in a lineup.

Image source: Apple.

Here's why I think Goldman's estimate is way off the mark and why TF Securities' estimate is far more likely.

6.1-inch model is meant to drive volume

The whole point of the three-iPhone strategy is to allow the company to have its proverbial cake and eat it, too. The 6.1-inch LCD model is almost certainly intended to allow Apple to catalyze iPhone unit shipment demand by bringing significant innovations to accessible price points.

To get to that more accessible price point, Apple is clearly doing its best to reduce component costs while still delivering a worthwhile device. This image from Kuo clearly shows where Apple is trying to save money with the 6.1-inch model:

A table comparing the specs of Apple's upcoming iPhones.

Image source: TF Securities via MacRumors.

If you examine the table, you'll see that relative to its higher-end counterparts, the 6.1-inch LCD iPhone has a cheaper screen, lower-cost casing material, a single-lens camera instead of dual lenses, a less advanced antenna, and a cheaper one-cell battery.

Based on these specifications, and considering the fact that the 6.1-inch LCD model should have the same sleek look that its brethren do, the device should be a compelling upgrade for a large portion of Apple's installed base (essentially anybody with an iPhone 7 series device or older). 

In addition to potentially being a price-friendly product aimed at driving upgrade activity among the current iPhone installed base, this device should allow Apple to more effectively compete with Android smartphone makers, particularly in regions like China (where local vendors are known for releasing devices with high specifications and relatively low prices).

At between $600 and $699, the 6.1-inch LCD iPhone could be extremely popular, offering an all-new form factor and upgraded internals compared to the company's prior offerings at a relatively accessible price point. At between $800 and $849, per-unit gross margins would be better, but Apple would likely sell significantly fewer of them.

The best part

The reason that Apple can and should price the 6.1-inch LCD model aggressively is simple: Customers who value more advanced features and technologies will have clearly superior products to buy if they're wiling to pay more for the upcoming iPhone Xs/iPhone Xs Max. Those who don't consider those features crucial and instead just want a sleek, modern iPhone that's still a great device in and of itself will have the 6.1-inch model to choose.

A good segmentation strategy means that a company offers strong products at each of the price points that it wants to participate in (allowing it to maximize shipment volumes) while at the same time ensuring customers have good reason to pay more for higher-end models if they're willing to spend more. 

The upcoming iPhone lineup looks like it's well designed to allow Apple to maximize both its iPhone unit shipments by appealing to a broad set of customers and iPhone average selling prices. I don't think the company will mess it up by trying to charge too much for the 6.1-inch LCD iPhone.

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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.