The Reason That Premium Smartphones Are Booming

Mainstream economic theory holds that demand rises as prices decline. Except - since there's always an exception - in the case of so-called 'Giffen Goods,' those products for which demand increases as prices rise.

The reason may be that smartphones have been a relatively affordable luxury whose performance and brand aura confers benefits greater perceived to be greater than the actual cost. It may also be that as functionality and relative performance improve at the same time the hassle and cost of switching out devices also rises that consumers will demand premium phones (made of better quality materials) which they plan to hold on to for longer time periods. It remains to be seen whether the premium trend can be maintained, especially as market saturation spreads from the developed to the developing world. JL

Tim Culpan reports in Bloomberg:

The experience last year of Apple, Huawei and ZTE suggests that smartphones may in fact be a Giffen good -- a product for which demand increases as prices rise. If this is indeed the case, the entrenched theory that price cuts are the only way to drive demand needs to be rethought.
Samsung's blockbuster earnings gave voice to a growing whisper about a surprising trend in the global smartphone market.
While the general consensus has been that competition is weighing heavily on prices, pushing handset makers to cut in order to drive volumes, the reality is that there's real strength at the top end.
It's true that an early release for the latest version of its flagship handset helped Samsung clock up stronger sales in the first quarter. But a tripling in first-month shipments for the Galaxy S7 compared with the S6 a year earlier probably reflects renewed demand for premium devices that stand out from an increasingly noisy and crowded catalog of mid- and low-tier smartphones.
Exhibit A in the case for the high end is Huawei. A strong push for models such as the P8 meant that the average price of the Chinese company's phones climbed 17 percent last year, according to IDC. Unit shipments jumped 45 percent, with the premium segment accounting for a significantly larger proportion of the total.

Increase in Huawei's average price in 2015  17%

Apple's average selling price rose more than 7 percent in calendar 2015, according to IDC data, with its shipment volume increasing 20 percent. The other major player to see gains from selling more-expensive phones was ZTE, with a 5.8 percent markup in price and a 20 percent jump in volumes. According to Counterpoint Research, the highest tier widened its share of total volume. So too did the bottom end, while the center got squeezed.
Given the gain for the cheapest models, it would be wrong to write off price cuts as a marketing strategy. Still, the price-demand dynamics for smartphones suggest that higher volumes driven by discounts may not translate to increased revenue (and will certainly squeeze profit per device). Whether you're a Beijing-based startup or a Cupertino-based behemoth, the end-goal ought to be boosting sales and not market share.The experience last year of Apple, Huawei and ZTE suggests that smartphones may in fact be a Giffen good -- a product for which demand increases as prices rise. If this is indeed the case, the entrenched theory that price cuts are the only way to drive demand needs to be rethought.

1. Bloomberg News reports that Samsung cut the price of its annual flagship release by up to 8 percent, yet the top end is less price-sensitive and such a cut doesn't account for a tripling in first-month unit sales.
2. For fiscal 2015, which ends Sept. 26, Apple's iPhone average selling price rose 11 percent with volumes increasing 37 percent.