The words price and cost often are used interchangeably as if they mean exactly the same thing. They do not. What’s the price of popcorn in a movie theater? I read somewhere that the average price is nearing $8 for the large bucket.
What’s the cost of the popcorn? That’s where it gets tricky. The popcorn itself may be the least expensive component in the entire operation. There’s a popcorn popper, butter, someone to make and serve the popcorn, overhead of the operation, the bucket itself, and much more.
Price is not cost. Take Apple’s iPhone as an example. What do each of the components in an iPhone cost? Only Apple knows. So, if you read an article recently that said Apple charges three times what it costs to make an iPhone, you read an article full of contrarian crapola. Only Apple knows the price of each component.
Let’s do some math. A 256GB, top of the line iPhone 7 Plus is priced at $969. If the ‘one-third‘ theory was accurate, Apple paid a mere $323 for the components. Since similarly equipped premium Android smartphones are priced starting at $400, I would wager that Apple may actually pay less for each component in the iPhone 7. But so what? Price of components is only one part of the process to assemble, test, certify, and ship an iPhone to a store or customer, and there are numerous additional costs that go into the mix, including design, marketing, research and development, etc.
The iPhone 7’s price is $969. The cost of components that make up the iPhone are known only to Apple, but gross margins have held steady at somewhere south of 40-percent for years, so all things considered, the iPhone 7 Plus actually costs Apple somewhere around $690, not $323 or less, as has been widely promoted.
That amount remains decent profit, especially considering that Samsung remains the only Android vendor to make enough profit to talk about, but I suspect that 2016 won’t be as good a year as the Korean conglomerate thought it would be. You know, what with all those exploding smartphones, tablets, and washing machines.
Price is not cost and cost actually has additional components which may include Apple Care, a screen protector, an external case, and so on. All those add to the cost of using an iPhone, and do not yet include whatever apps you would purchase to use on the iPhone. That’s part of the cost of ownership, too.
Value is a bit more difficult to understand and narrow down to a dollar amount, because too much of value is subjective. For some iPhone users, the value is tremendous because they run an entire business or career from their phones. For others, the iPhone is a convenience but doesn’t represent as much value.
There is one component of value which can be measured. Resale. Traditionally, used iPhones have tremendous resale value and whatever that amount is can be deducted from the price, which helps to reveal a lower cost of ownership. So, even though an iPhone sells for more, higher resale helps to bring that so-called cost down substantially.
It’s not an Apple to apples comparison, but you’ll see what I mean with this example. An iPhone 6s Plus retails for about $750, but you can sell a used one on Gazelle for more than $300, and many customers sell theirs for even more. That cuts the initial price substantially and improves the iPhone’s value.
So, when you read articles that claim an iPhone costs this or that, just smile and move on; there’s nothing to see there because it’s a gratuitous display of sensationalism, and nothing with any insight into how products are developed, manufactured, sold, or used.