The Economics of Apple – What is the Apple Tax?

Let’s face it- Apple products have hardly ever been cheap, and the cost of its products have been drastically on the rise. Consider an iPhone for example: the initial product of 2007 started out with a price tag of $499. And, as of 2018, the iPhone XS has a hefty price tag of $999!

What causes Apple products to constantly push the price ceiling? Some people may be of the opinion that its greed. After all, like all business, Apple too is incentivized by higher profit margins. It has risen to the position of being one of the most valuable companies in the world. Consumers who own or have owned Apple products are sort of locked into Apple’s very own ecosystem which allows the company to exercise some of its powers. Think of this as Apple, having a monopoly on a customers’ digital life. It boils down to the fact that Apple can convince us to purchase these highly priced products- the phenomenon we refer to as, the Apple Tax. This tax is the amount that customers are actually willing to pay to purchase Apple products over a competitor’s product with similar features. But what is the reality behind these exorbitant price tags? Yes, Apple definitely wants to earn more and more money- Wall Street demands pretty much the same. The company, however, has always said that it wants to manufacture great products.

Apple has been maintaining that it strives for innovation. They are more inclined towards making products that redefine quality and capability in terms of functionality. Both the original iPhone and the iPod are regarded as the products that changed the world. The iPad, soon after its launch, had become the fastest selling music device in history. And technologically speaking, as we already know, more often than not it comes with a higher price tag. So, in a way, when you spend on that brand-new iPhone, iPad or Mac- you’re funding future innovations like the same. It is what helped Apple earn its place in the market.

However, in recent years, it hasn’t quite been the smooth sail it’s always been for the company. There are concerns over Apple’s ability to continue to launch innovative products. There have also been signals that its industry dominance is under pressure. The company reached its peak in terms of iPhone sales in 2015, post which the profits had begun to fluctuate as well. Now, let’s comprehend something- the life span of smart phones is increasing, and consumers do not feel the need to upgrade to a new/ better version. But Apple is a publicly traded company. One of the possible ways to combat declining sales is to raises prices, which in turn, enables a company to have higher profit margins. In 2018, the base price of an Apple watch went from $329 to $399. An analysis found out that the manufacturing cost of an iPhone X was 25% more than that of an iPhone 8. That being said, the former’s retail price was 43% more than the latter’s. Quite a smart strategy, right? Ofcourse it is. And, what’s more important is that, it’s effective.

The price of say, iPhones, vary from one nation to another. For instance, iPhones are more expensive in India when to compared to their price in Japan. Why? It’s due to the tax factor and the depreciated value of the INR. Moreover, Apple has to collaborate with Indian retail agencies in order to sell its products. And thus to maintain profit margins, Apple sells the device at a higher price. In short, people do not mind paying that extra load of cash. That’s the power of goodwill and consumer tastes and preferences in this industry.