Apple execs are now acknowledging the company is going to need to raises prices to cope with higher component costs, particularly memory. Apple has been battling to avoid doing so, but warned this week that those efforts are “unsustainable.”

The price pressure is being felt across the tech industry. Omdia predicts the average selling price (ASP) of smartphones globally will increase by around 20% this year — partly because AI industry demands have pushed up RAM prices and partly because of rapid cost increases in processor production as a direct consequence of war in the Middle East. This impacts anything that uses memory or processors.

Apple must raise prices, CEO warns

“We’re doing our best to mitigate the huge increases that are being passed to us, and we’ve been trying to shield our customers from the increases, but the situation has become unsustainable,” current Apple CEO Tim Cook told the Wall Street Journal.

OK, so prices are going to go up. But how?

If Apple must raise prices, the way it does so matters. Will it increase prices across the board, or choose a subtle, strategic approach that protects margins while also maintaining rapidly accelerating market share growth?

Until now, Apple has been benefiting from the rising tide in memory prices. While competitors have been steadily increasing prices across the board, Apple introduced its first $599 laptop even as it eats into mid-range smartphone sales. 

To grow, or to grow less?

The PC industry is not growing (outside of Cupertino), and Apple and its investors already know that the inordinately high customer satisfaction ratings its platforms enjoy mean that when people switch to them they tend to stick around. That’s why it matters that Cook highlighted record switchers and first-time platform users during the company’s most recent fiscal call. Apple is growing new customers, people who are likely to sign-up for services, accessories, and future upgrades. Winning the customer is an investment in future performance.

When it comes to increasing prices, we’ve seen some gentle experimentation in the Mac mini line, where the entry-level $599 model was effectively replaced by a more expensive $799 SKU. There have been suggestions Apple could do the same with the $599 MacBook Neo, dumping the entry-level build in favor of the (better) $699 model. I’m not certain that’s the best approach. 

A matter of choice

I’d argue that the $599 price point is psychologically the best bit of marketing Apple has ever done as it draws new users to look at its platforms. I also think substantial numbers of people already shift up to the $699 version, if they can, making that entry-level price an incredibly effective marketing tool with which to woo customers. It looks like that approach is working; the MacBook Neo has led the Amazon Laptop Sales chart ever since it was introduced and is selling in huge quantities globally.

Francisco Jeronimo, IDC vice president for data and analytics, sees this, writing: “It will be interesting to see whether Apple raises prices across its entire portfolio or plays strategically by subsidizing its more affordable products to gain market share and grow its installed base.”

If Apple raises prices at the price sensitive, entry-level end of its market, it runs the risk of slowing its own resurgence. Given that a 10% price hike here is only worth around $60, the revenue generated might not justify blunting Apple’s offer to new users.

Pricing and strategy

But Apple isn’t defined by its entry-level markets. Its biggest earning opportunities continue to be generated by the aspirational middle class, who, while feeling the pinch of declining living standards in many markets, can still handle the price of a top-of-the-range iPhone Pro. A 10% price increase at that end of the market will generate a much more significant chunk of revenue – and since rival vendors are raising their prices at this end of the market, Apple can follow suit while still seeming affordable. It’s an approach that maintains growth while optimizing margins.

Apple generates roughly half its revenue from iPhone sales, with the Pro and Pro Max devices accounting for a significant chunk of that money. Consumers looking to buy one of Apple’s high-end devices are likely to be less price-sensitive than those making purchases at the low- and mid-points of the company’s market range. 

With that in mind, it makes more sense for the company to raise prices at the top, while working to maintain the cost of entry at the lower end. It could, of course, raise prices universally, but doing so makes less sense.

What next?

Whatever strategy Apple adopts, company leadership is clear that component pricing is hitting hard. “We definitely need memory pricing and supply to return to reasonable levels for consumer products. That’s the bottom line,” Cook said.