Why The iPhone’s Average Selling Price Increased Despite The “Free” iPhone 3GS

Earlier this week Apple released its Q1 2012 financial results and it was a blockbuster quarter, Apple's best ever with $46.33 billion in revenue. One of the key factors that drove this sky-high figure was the sale of 37 million iPhones at an average selling price (ASP) of $660 — iPhone sales actually contributed to 53% of Apple's revenue for the quarter.

Significantly, this was the first full quarter where Apple offered a "free" iPhone in the US to customers going on contract — the iPhone 3GS. Previously Apple had offered the 3GS alongside the iPhone 4 at a reduced price, but with the 4S the iPhone 4 fell to $99 and the 3GS became free. One would have presumed that the iPhone ASP would thus fall with the addition of another lower-priced iPhone model but in fact the ASP increased from the previous quarter and at $660 the iPhone ASP is near the highest it has ever been.

How has the ASP risen despite the presence of the "free" 3GS?

There are a few reasons as to why the ASP has increased and a big reason is that in addition to the new lower-priced 3GS ($345), Apple also introduced the 64GB iPhone 4S that is at a higher price-point ($849) than the previously most-expensive iPhone. This new higher-priced model would seem to have offset any reduction in the ASP that the iPhone 3GS would have caused - particularly given Q1 2012 was the 4S launch quarter and demand was very high for the new iPhone model.

Whilst Apple didn't give out details on what the breakdown was of sales between the iPhone 4S, 4 and 3GS, an estimate from Consumer Intelligence Research Partners suggests that in the last quarter the iPhone 4S represented 89% of all iPhone purchases in the US. The report showed that only 4% of iPhone purchases last quarter were for the 3GS and 7% for the iPhone 4. This backs up the notion that the higher-priced iPhone 4S 64GB model (estimated to be 21% of iPhone 4S purchases) actually offset any decrease in the ASP and probably drove the increase in ASP to $660.

How will the iPhone ASP fare in the following quarters?

As Horace Dediu of Asymco points out, there is usually a slight uptick in the iPhone ASP during a launch and holiday season. This would suggest that in the following quarters the ASP may decrease a little as the high launch demand for the 4S subsides a little. It is unlikely to drop that much though, with the iPhone ASP typically hovering somewhere between $620 and $660. Dediu also investigated the historical ASPs for the iPhone, iPad, iPod and Mac and found that "Apple does not change pricing but rather stakes out a specific price point as resonating with consumers given their positioning". The above chart demonstrates this point quite well.

[Sources: MacRumors, Asymco, AllThingsD]