Why is Apple so expensive? | CNBC Explains

This laptop, cell phone, tablet, and headphones together cost more than $3,500, about the same as two and a half months' rent for the average American. Let's be honest. Apple products have never been cheap. And the cost of some of their products has increased dramatically over time. Just look at how the price of the iPhone has increased over the years. What started at $499 in 2007 now starts at $999. So what makes these products so

expensive

? Well, some say, it all comes down to the sole reason that Apple can convince us to pay the high price. There is even an unofficial term for this phenomenon.

It's called the Apple Tax and it describes the extra money customers are willing to pay for an Apple product compared to a competing product with similar features. And it's often attributed to the so-called "cool factor" associated with Apple. It's those high prices that helped catapult Apple to become one of the most valuable companies in the world. And in early 2019, it announced that it had a whopping $245 billion in cash reserves. But Apple would say customers are paying a premium for a reason. In 2018, Apple CEO Tim Cook defended the company's most

expensive

iPhone yet, saying it had replaced the need for other devices like a camera, video recorder and music player.

He maintains that creating the “most innovative product available” “is not cheap” and that Apple will never sacrifice quality for price. So all that money you're shelling out for your new iPhone is, at least in theory, helping to fund future innovations like this. Innovation is what helped Apple earn its prestige. It is, above all, a phone, as you would expect from the iPhone. You have all your contacts there, but it's different than most mobile phones: it syncs with your computer. Both the original iPod and iPhone have been touted as world-changing products. When the original iPod came out in 2001, it cost $399, a staggering price for a personal music player at the time.

Apple aggressively marketed the iPod as a device that could store 1,000 songs in your pocket, all on the cusp of the digital download revolution. In less than six years, Apple announced that more than 100 million iPods had been sold, making it the best-selling music player in history. In 2005, Apple announced that its annual profits soared 384 percent, largely due to the huge success of its new digital music player. Their profits would continue to grow through 2012. For many of those customers, the iPod would become the first of many Apple purchases, so that $399 purchase would ultimately make them more likely to, not just potentially buy new ones. versions of the iPod, but eventually goes on to buy iPhones, MacBooks, iPads and Apple Watches.

You get the idea. Suddenly, you're trapped in Apple's ecosystem, which some experts say has allowed the company to raise prices faster than its competitors. Think of it as Apple having a monopoly on a customer's digital life. The iPhone, which debuted in 2007, would eventually replace the iPod, and this was responsible for even more impressive growth. Global iPhone shipments increased year over year until reaching a peak of 231 million in 2015. That's more iPhones than people in most countries. But there is now some concern about Apple's ability to continue innovating, and even some signs that its growth and industry dominance are under pressure.

You see, Apple hasn't been able to surpass that iPhone peak since then. And profits have also started to fluctuate. So why the spike? Well, it's part of a broader trend we're seeing across the industry. The lifespan of a smartphone is getting longer, which means customers simply don't upgrade as often as they used to. But as a publicly traded company, Apple is expected to grow for its shareholders, and one possible way to combat declining sales is to simply increase prices. This allows you to have higher profit margins. In 2018, the price of the basic Apple Watch went from $329 to $399.

And let's not forget the time he tried to sell the Apple Gold watch for $10,000. A 2017 analysis found that the iPhone X cost 25 percent more to manufacture than the iPhone 8, but sold for 43 percent more. According to one company, the iPhone In recent years, to help grow its business, Apple has made it a priority to increase sales in the world's most populous country, China. And while it has had some success, it also faces some serious competition. Ironically, the sheer expense of Apple products has hurt sales in countries like China, India, Brazil and Turkey, emerging markets that the company desperately needs to continue growing.

Prices for premium smartphones have increased across the board, but compared to their competitors in China, iPhones cost a lot. Take, for example, the iPhone XS Max. It costs about $1,400 in China, essentially double the price of Huawei's Mate 20 and three times the cost of Xiaomi Mi's Mix 3. Add to that a stronger dollar, tariffs, and an economic slowdown, and it's no surprise that in mid-2018, Apple's iPhone fell to third place among the world's most popular smartphones. That's when Chinese tech giant Huawei surpassed it. Just look at the percentage change in Apple's share of the smartphone market compared to its competitors.

That same year, Apple announced that it would no longer report iPhone units sold, which Wall Street interpreted as a likely sign of a further decline in sales. At the end of the day, most experts agree that Apple needs to introduce new innovations and not just raise prices to maintain its place as one of the most valuable companies in the world. Hi guys, I'm Uptin. Thanks for watching! To see more of our videos, check out my day inside Huawei's China headquarters here, and inside Alibaba's grocery store and robot restaurant, here. We also welcome suggestions for future CNBC explainers, so please leave your comments in the section below.

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