Writing for The Verge Thomas Ricker says that Apple should offer wireless earbuds with their new iPhones since you can get a decent pair for $29. I thought that was humorous since Apple should be able to spend significantly more than that without experiencing any margin deterioration.
If my calculations are correct, Apple is going to save about $23 per iPhone in gross margin by stretching the lifespan one more year. But you can’t compare $23 of gross margin to headphones that sell for $29. It’s not an apples-to-apples comparison.
Gross margin is price less material, labor, and overhead involved in manufacturing. A company has to allocate selling, general, and administrative costs on top of that. Then there’s income tax too. So when I say that Apple gains $23 in gross margin, the equivalent headphones at retail would be a lot more. Plus, Apple also gets back the value of the EarPods that they would be swapping out. These retail for $29.
So what does $23 in gross margin equate too at the price level? Apple has a gross margin of about 40% of net sales. That means if Apple’s budget of $23 for manufacturing costs was translated up to sales price, they would go for a retail price of $38. Add back the $29 for the EarPods and you’re up to $65 retail value.
If you’re shopping for Bluetooth headphones you could find quite a variety of decent ones for $65. It sounds like you can even get them for as low $29. There’s no financial reason for Apple not to offer wireless headphones all other things being equal. However, it’s possible that Apple could be using their increased financial leeway in other area’s. The camera comes to mind.
So Apple could offer the equivalent of retail priced $65 headphones with their new iPhones and not suffer at all from a profitability standpoint. I don’t know if Apple is going to offer wireless headphones but if I was advising them from a financial standpoint, I’d say if you’re ever going to do it, this is the year.
Gross margin is price less material, labor, and overhead involved in manufacturing. A company has to allocate selling, general, and administrative costs on top of that. Then there’s income tax too. So when I say that Apple gains $23 in gross margin, the equivalent headphones at retail would be a lot more. Plus, Apple also gets back the value of the EarPods that they would be swapping out. These retail for $29.
So what does $23 in gross margin equate too at the price level? Apple has a gross margin of about 40% of net sales. That means if Apple’s budget of $23 for manufacturing costs was translated up to sales price, they would go for a retail price of $38. Add back the $29 for the EarPods and you’re up to $65 retail value.
If you’re shopping for Bluetooth headphones you could find quite a variety of decent ones for $65. It sounds like you can even get them for as low $29. There’s no financial reason for Apple not to offer wireless headphones all other things being equal. However, it’s possible that Apple could be using their increased financial leeway in other area’s. The camera comes to mind.
So Apple could offer the equivalent of retail priced $65 headphones with their new iPhones and not suffer at all from a profitability standpoint. I don’t know if Apple is going to offer wireless headphones but if I was advising them from a financial standpoint, I’d say if you’re ever going to do it, this is the year.
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