The Daily Prosper
Is the cost of technological devices justified?

Is the cost of technological devices justified?

More and more companies of the sector fix their prices around the perceived user experience, and not the cost of production.


November 2017. Thousands of people make huge queues in front of Apple stores around the world to get their most desired booty: the new iPhone X terminal. A model that costs 1,329 euros and that runs out in many cities a few minutes after going on sale. The images go around the world and demonstrate once again that, for some, the apple brand is almost a religion. It does not matter whether you spend a night on the street without a wink of sleep if you are trying to get the new smartphone from the company from Cupertino.

What many of them may not know is that the production cost of that device is far, far below that stratospheric price that they are going to pay to put the device in their pocket. A report by Chinese analysts estimates $412.75 (about 345 euros) as what it costs to produce the electronic components of the iPhone X. Yes, to this we have to add a series of expenses beyond what is pure and hard manufacturing: marketing, logistics, software, distribution, after-sales, etc.

With data in hand, is this price difference justified? Experts agree: on the one hand, the law of supply and demand governs the free market, but another factor adds, What is happening for the first time in the technology sector is that some companies no longer price based on cost but rather fix prices around the perceived experience. And who decides how much my experience is worth?” Asks Sandra Sieber, professor of Information Systems at IESE Business School.

In other words, certain companies (such as Apple and Samsung, the two flagships of mobile technology) are really interested in seeing which consumer segments are available to them and how much money they are willing to pay. Also, before deciding the final sale price, they have carried out a detailed and thorough market study that provides them with enough reliable information on whether or not their pricing policy is correct.
 

Bubble or not?

There are already voices that talk of bubbles in the market of technological devices; a hypothesis that does not convince Sieber. “There would be if it were the manufacturers who forced us to pay a certain amount of money, but with the great offer, there is always another cheaper alternative even within the same platform like Apple or Android,” this expert explains. For the IESE professor, one of the keys is that it is not enough to hold on to the mere value of the device: we must think about what makes the terminal’s value increase for the final consumer. “At the moment, a smartphone is worth what it's worth because people pay, and that's because the ratio of phone usage has multiplied in a very short time. That increases the value,” he reasons.

According to a recent study by the cosultancy IHS Markit,, the cost of the materials of the Samsung Galaxy S8 (another of the most expensive mobile devices on the market until a few weeks ago) was 301 dollars (242.5 euros), a figure too very far from the 725 dollars (584 euros) of the final sale price. The touch screen, the motherboard, the chassis and the covers are the most expensive components in the production of a smartphone. Another report from the end of 2017 published by WIPO (World Intellectual Property Organisation), also offered some clues as to the profit margin of some manufacturers: Samsung obtained 34% with the Galaxy S7, while Apple (with the iPhone 7) and Huawei (with the P9) they reached 42%. From the industry they insist that, with the exception of a few manufacturers, the reality is very different.

“Mobile phones are always a good workhorse for people to know you, but it is not a business to make money. There’s no way you’ll get rich only with these devices,” says David Purón, co-founder of Blackphone and current CTO at Barbara IoT, a company specialising in the development of secure software and firmware for connected devices.

This is so, he says, because production costs, added “to the hidden costs” (certifications, regulations, tariffs and customs, logistics, marketing, after-sales) and the “brutal competitiveness” among manufacturers makes margins very low. “You cannot directly attribute the price to the hardware, which is what many people think,” he says. In his opinion, paying 400 or 500 euros for a device of these characteristics “is not an outrage, because they are devices that are worth that”. “They are really pocket computers. Today, with a mobile phone you can do almost the same as with a PC. At the level of capacity there is little difference.”

The case of Xiaomi is another significant example. Its most expensive device, the Xiaomi Mi Mix 2, costs 499 euros (in the 6 GB RAM and 64 GB capacity version). Together with the Xiaomi Mi 6, of the same price, they are the two premium phones of the Chinese brand, which is characterised by offering smartphones of enormous quality at very competitive prices. Their profit margin is very low. “They make money with other things: they sell everything from vacuum cleaners to pens,” industry sources explain.

Prices that are at the antipodes of the iPhone X. Again, the aspirational factor appears as an element to explain these abysmal differences. “Brands create addicts, and addicts will pay what you ask. For instance, the same factory that produces the components of the iPhone produces telephones that are worth a third of that, and it is the same factory, they are the same components, the costs they are the same ... but Apple commands,” says Purón.
 

Smaller … and dearer

Purón points to another factor that influences prices: miniaturisation. “People think that the smaller things are, the less they have to cost. And in electronics it is the opposite. A mobile, with the same capacity, has to be more expensive than a computer because the manufacturing processes are more complicated,” he says. Sandra Bieber agrees on this point, recalling that technological devices increasingly offer more functions in a smaller physical support, which increases the selling price. The logical thing, then, is that increasingly smart elements have a higher cost.

And China? Does it influence prices in any way? The answer is that it does. The Asian giant has specialised in the market of consumer electronics and microelectronics, making it almost impossible to manufacture this type of device outside its borders. Replicating the microsystem away from China, in Europe, for example, is “pure utopia, something impossible” in the opinion of the engineer David Purón. “China has a brutal control of this whole industry.  If it wanted, it could decide on a price increase and control demand. It is absolute dependence,” he laments.

But things change when pricing is based not so much on the pure and hard cost of the terminal, but rather on the value of experience. When that happens, professor Sieber advances, companies “can decide to geolocate to other countries” that are not so cheap, which is something that has already started to happen.