Author(s): Raghu Gopal
Ben Wood, Peter Bryer
Early in 2017, we argued that the $1,000 smartphone could become the new normal. Top-of-the-line phones stuffed with all the memory money could buy were already approaching that price tag in the US and the market was being warmed for phones to cost that much (see A Grand Vision). Although the prices of most consumer electronics tend to fall quickly over a short time, makers of flagship smartphones have not only avoided price erosion, but reversed it.
When the iPhone was introduced 11 years ago, the $499 price from AT&T certainly raised some eyebrows, and many wondered if Apple was out of touch with the market. It did seem like a lot of money at the time for a company that wanted to create a mainstream product, but Apple proved that a very usable device brought more value.
In September 2017, when Apple introduced the iPhone X, many pondered what the ceiling was for smartphone prices. How far could manufacturers push consumers' willingness to pay? Again, Apple showed it understood its audience. The iPhone X has become one of the best-selling smartphones since its launch. It was really a notch above the rest.
For consumers, a smartphone that can really change their quality of life, or at least has that perception, is seen as an investment. People know that they'll use their new device to surf and to play, to communicate and to pay. They're glued to their phone for three years or more, and the length of ownership keeps extending. Indeed, CCS Insight's new survey of the customer purchasing journey for mobile services shows that phone replacement rates — currently at their longest in recent memory — will continue to lengthen. Over a third of respondents in France and the UK told us that they expect to keep their existing phone for longer than their previous one. This was much higher than the number anticipating that they would own it for a shorter period of time.
Customers are also becoming much savvier about the residual value of their phone, understanding that they'll be able to sell it after a couple of years and still get a meaningful sum (see The Value of Smartphones). These are some of the factors smartphone buyers are considering to measure a return on investment.
Now that the $1,000 smartphone is no longer seen as an extreme, we have to wonder where the market is headed and what other truly usable features device makers might add to justify further price hikes. Gimmicks won't do it, but top manufacturers know that we're still close to the beginning of this trend. Phones will gain more uses in everyday life, but their costs will rise with these capabilities.
There are some clear immediate technical changes arriving that will boost prices. For example, 5G connectivity will push costs higher, as will new, larger, and in some cases, folding displays. Keen new camera features such as multicamera set-ups and thermal imaging are coming to more phones. These are costly additions that affect the bill of materials for devices, but if implemented and marketed effectively, they could prove to be valuable elements, bumping up hardware prices further.
All these new developments are within sight, but we also see a world where other capabilities, such as healthcare-related features, will accelerate increases in prices of flagship smartphones and sway customers to buy additional must-have accessories. High-end, on-device sensors and body-worn sensors that will, in some cases, be packaged with smartphones, could lift the price ceiling for handsets and their ecosystem.
Given the huge role that smartphones play in daily life, and the additional value that we still expect them to bring, it seems likely that Apple, Samsung and others will push their products to new levels and, of course, their prices too. How we pay for devices could become the most exciting competition for customers in the next couple of years.