Product Accounting in Smartphones

Introduction

The smartphone industry is characterized by a diverse selection of offerings, many of which are similar in nature but significantly different in price. As such, product accounting is essential to the success of a product in the sphere. Some companies set high prices for their smartphones and enjoy considerable success in sales due to brand strength or miscellaneous quality of life advantages. Others sell models with similar specifications at a fraction of the price and still attain significant results due to the value propositions of their offerings. This research paper aims to determine the optimal pricing strategies for the sale of a smartphone model, both worldwide and in the United Arab Emirates.

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Study Background

The Scenario

The hypothesis used in this research is that a new company is attempting to enter the market, releasing its first production model. The latest entry is based on many of the same components as competing offerings, but it has several features that allow it to differentiate itself from the rest. Energizer’s “Power Max P18K” (n.d.) can serve as an example, as it offers an unusual front camera setup and an unusually large battery, which may address the consumers’ independent usage concerns. The model appeals to a specific category of users, and the following products may cover other niches to broaden the company’s appeal, but the success of the initial attempt is vital to the continued well-being of the company.

However, the newly created item does not have a sufficient appeal that separates it from other offerings in the category. While its strong points place the product among the market leaders in specific groups within the industry, it lacks the outstanding features of other offerings. Furthermore, being the first smartphone of the company, it has not undergone the critical review of the broader public, which can sometimes identify concerns that did not surface in focus group testing. Furthermore, it cannot draw on the reputation of its predecessors in a fashion similar to that of the competition. As such, it is going to have to appeal to considerations other than its existing value, which necessitates the use of product accounting to determine the appropriate price.

The smartphone industry is characterized by low competition, which is enabled by the small number of companies that participate in it. Most smartphones are made out of the same or similar components, and therefore the differences between the devices offered by different companies at the same prices are usually minor. This homogeneity of products indicates that the system is an oligopoly, where a few companies dominate the market and do not compete with each other, selling similar offerings. However, the reliance of most manufacturers on the same component producers also means that it is relatively easy to enter the market. A company can achieve many of the specifications provided by industry leaders by purchasing the appropriate components from the company they use.

The smartphone released by the hypothetical company will be targeted at the middle price segment. The company does not yet have the practical experience that would allow it to be able to focus on the upper price range. In addition, according to Gordon (2016), phones that cost less than expensive models retain a large portion of their functions, meaning that it is possible to make a model with excellent specifications and make it affordable. As the company’s first entry into the smartphone market, the model discussed in this paper should make an impression on the public. As such, it should have a price that would allow it to be sold to many people and the execution of the essential functions that would justify the cost.

As a mid-range product, the smartphone should appeal to most population categories. Smartphones are a necessity in the modern age, and most people require one to satisfy their needs for communication, entertainment, self-expression, and efficiency. Chen, Chen, and Lin (2016) claim that access to recreational resources and job necessity are the principal reasons why people would purchase the devices, identifying children, adolescents, and adults as the primary target markets. Furthermore, according to Habbal (2017), senior adults in the UAE increasingly use smartphones and are only concerned about price. However, it should be noted that the devices can last a significant time, as with many electronic devices, and current smartphone owners would not necessarily be interested in a new model. The new model will primarily appeal to people with average incomes who are interested in replacing an aging smartphone or purchasing one for the first time.

The Issues

The primary issue that faces the company is a high degree of competition present in the market, particularly in its mid-range segment. The smartphone has to prove itself against a variety of other offerings, many of which are created and promoted by well-established companies. Furthermore, the design is already finalized, and the only possible adjustments to the value of the product have to come from its pricing. Ameen (2017) notes that “price value proved to be significant in [Iraq, Jordan, and UAE],” suggesting that the metric influences consumer decisions significantly (p. 361). A correct determination of retail price can contribute to the popularity of a product to a great extent, helping to establish the company in the market.

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The company is a newcomer to the market that does not have an established consumer base or a powerful brand name. As such, it has to rely on the strength of its product and marketing to generate sales. Furthermore, due to the complex nature and relatively high price of smartphones when compared to many other products with mass appeal, newcomers to the market can struggle to win consumers’ trust. An understanding of trends and typical behaviors is essential to a successful marketing and sales campaign. The knowledge of worldwide tendencies can suggest potential innovations, while information on the preferences of UAE consumers serves to adjust them to the local market. In particular, it is essential when choosing the target audience, which largely determines the price range.

While approaches that favor a low-profit margin to establish a price that is lower than that of the competition can be useful, they may not always be applicable. Chen et al. (2016) note that consumers will often choose the more expensive option when inspecting two smartphones, indicating that they believe the price to reflect the quality and want a superior product. At the same time, as Ritchie (2019) states, models that are too expensive tend to be unpopular with audiences regardless of whether the cost indicates a high-profit margin or a sizable base cost of the components. An optimal strategy would be to discover a middle ground that convinces people that the product is a high-quality one but does not set the bar prohibitively high.

Related Studies

Three categories of literature had to be reviewed for the discussion in this research: studies of consumer behaviors, analyses of other companies’ approaches to the market, and investigations of the relationship between price and value. The inquiry into customer tendencies involves their adoption of smartphones and the factors they use to determine whether they will purchase a device. The works in this category include those by Ameen and Chen et al. They investigate the overall traits favored by consumers and the adoption of smartphones by specific categories of the United Arab Emirates population. The combination of these data enables the creation of an initial pricing method, which will then be adjusted according to the other information.

The strategies employed by other companies with regards to pricing and their outcomes can be highly beneficial to the formation of an approach, as well. The gathered research looks into the relevant processes of Apple, Xiaomi, and Huawei. Ritchie (2019) describes the consistently high prices set by the first company and their influence on the market. Rawal, Awasthi, and Upadhahay (2017) discuss the approach of the second corporation, which can be described as the opposite of Apple’s, with affordable yet powerful devices. Lastly, Saif and Aimin (2015) describe Huawei’s approach and provide recommendations for its further growth in the Arab world. All three of these companies enjoy considerable worldwide success, and a company that enters the market should learn from their successes and failures.

The final literature category pertains to the price-setting process itself, offering suggestions as to the cost of the smartphone relative to its direct competition. Primanto, ABS, and Slamet (2018) provide the necessary framework based on the data from a popular marketplace. Chen et al. (2016) modify the basic notion and offer corrections to it, adding complexity and precision to the model. Many of the other works reviewed in this paper also investigate consumer purchasing decisions and satisfaction in relation to price, but they supply less detailed conclusions and are more useful for other purposes. Ultimately, price setting is a highly delicate process that should take the multitude of local variables into account to accurately reflect the amount people would be willing to pay.

Literature Review

Successful Strategies

Apple is a well-known market leader that still retains a significant share of the smartphone market worldwide. However, according to Ritchie (2019), its sales have been on the decline recently, in large part due to the prohibitively high prices of the new iPhone models. Ritchie (2019) notes that the profit margin on the devices remains the same or lower than it used to be for the original models, and the massive increase in price is accompanied by a proportional rise in the phone’s base cost. Furthermore, the loss of various subsidies is exposing consumers to the real, non-discounted cost of the phone. iPhones are still considered premium products, but now people decide that they are too expensive to be worth purchasing instead of competing alternatives more often.

Xiaomi is a corporation that focuses on the Chinese and Indian markets but has been expanding to other areas recently as its business grows. Figure 1 shows that it has been expanding its presence and growing steadily. According to Rawal et al. (2017), the company offers aggressive pricing on its devices to establish a brand presence and obtain an advantage over the competition. It extracts profits using its customized software and promoting brand loyalty to encourage users to buy other products manufactured by the company and spread advertising via word-of-mouth. The approach has been highly successful, and Xiaomi is among the market leaders in the areas where the company operates, having grown into a giant smartphone manufacturer in four years (Rawal et al., 2017). However, it should be noted that the company had significant resources at its disposal before entering the market, which may not be the case for the firm used in the present scenario.

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F

Smartphone Manufacturers Market Shares.
igure 1. Smartphone Manufacturers Market Shares. (“Global Market Share,” n.d.)

Lastly, Huawei shares numerous similarities with Xiaomi, also targeting the lower price ranges and achieving significant success in the same geographical locations. Saif and Aimin (2015) state that the corporation mostly focuses on users with average incomes and sets correspondingly low prices to suit their preferences. The company has more premium offerings, as it has spent enough time in the market to be able to grow significantly and to diversify its product lineups, but those products sometimes suffer from their associations with the primary specialty of the brand, which is the creation of budget options. Given enough time, the two branches of production will likely grow sufficiently distinct that the consumers will stop associating the two or view the cheaper models as ones that inherit the excellent quality of their expensive counterparts. Nevertheless, Huawei has an extensive global presence and can be considered to be an example of successful budget phone marketing.

Pricing Approaches

The logical method to obtain an advantage over the competition using the only price is to set a lower cost than your competition. The study conducted by Primanto, ABS, and Slamet (2018) supports this notion, indicating that the demand for a particular smartphone is inversely proportional to its price. The less a device costs, the more consumers will take it into consideration when selecting a new model or a replacement for an old one. However, there exists a bottom limit for such manipulations that is determined by the base value of the phone. It would be impractical for a company to sell its product at a loss, even as a promotional measure, as the model is ultimately unsustainable, and newer versions that were sold at a profit would lack the same appeal and damage the established image.

However, prices that are too low can be taken to signify a lack of confidence in the product and the belief that it belongs to a lower cost and quality category, adversely influencing the popularity of the product. Chen et al. (2016) claim that only a third of the respondents in their study would choose the lower-priced alternative and add that popularity is a significant factor that affects one’s choice of smartphone. The determination of price is a matter of attaining a balance where the offering is not too expensive and is attractive for the target audience but also displays confidence through its cost. The research is limited by the small sample size and its local nature, but the trends exhibited can likely be extrapolated to most populations worldwide.

Discussion

Strategy Inspirations

While Apple’s recent sales drops are not a positive example of its strategy application, the company’s pricing approach has remained consistent and successful, and it is the company’s technical side that is responsible. As it is shown in Figure 2, the company’s profit margins have mainly remained the same or fell, but the base cost of the phones rose due to the addition of new, expensive components, and the loss of subsidies revealed the real value of the devices, which many consumers were not ready to afford. This research concerns itself with product accounting, which deals with price, and the technological side is not relevant here, so Apple’s example is not necessarily one where much can be learned. However, the strategy suggests one method that would allow the company in the scenario to undercut its competition significantly without endangering profits.

The Profit Margins of Apple Phones.
Figure 2. The Profit Margins of Apple Phones. (Ritchie, 2019).

The method is various subsidies that would reduce the market price of the device in exchange for locking it into a contract with a specific telecommunications company. Said company would pay the manufacturer the remainder of the sum, compensating it for each phone that was sold and ensuring consumer as well as company satisfaction. The product could still be released into the general market for its actual price, which would help convince people that its real cost is significantly higher and that they are getting a high-quality device for substantially less than they would usually pay. Furthermore, the approach would push the telecommunications provider to advertise the collaboration, creating additional publicity for the phone, especially among the users of the service.

The example of Huawei offers a model of success through perseverance and excellence with low-priced phones that are similar to the company’s offerings. The Chinese corporation offers a broad lineup of mostly inexpensive but powerful devices that are within many people’s reach, a trait that allowed it to gain momentum and become a dominant force in the global market. As Saif and Aimin (2015) indicate, Android phones should display a moderate price, as the popularity of the operating system and the reputation of the products using it as relatively inexpensive but excellent should ensure good sales and, therefore, profits. As many consumers will view the company’s first offering as the defining factor in its continued reputation, it should present a phone that is priced reasonably for its range of features to foster their goodwill.

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Xiaomi offers an extreme version of Huawei’s strategy that can be viable if the company has significant spare resources. In this pricing model, the phone’s price should be set with a minimal profit margin, and the firm will generate money from miscellaneous offerings such as software and accessories (Rawal et al., 2017). While the notion may be viable for a company such as Energizer with its wide variety of other offerings that can complement a smartphone, a new business would likely not have the resources nor the product range to support such a proposition. It should also be noted that Apple also benefits considerably from its well-developed infrastructure surrounding smartphones without employing Xiaomi’s strategy, so the approaches are not mutually exclusive. However, this method is in large part responsible for Xiaomi’s meteoric rise in the market, and it should be taken into consideration if the possibility of implementation exists.

Pricing Methods

As was mentioned above, the price of the offering should be moderate to low, though it should remain in the range that ensures a sufficient profit margin for the continued functioning of the company. It should stay competitive with comparable products by other existing companies and possibly have its price be slightly lower than the closest analogs. However, there is an argument to be made about making the price the same or even somewhat higher to indicate confidence in the product quality and encourage purchases as per Chen et al. (2016). With sufficient marketing that emphasizes the specific advantages of the smartphone, it is possible to secure an initial consumer base that will purchase the device and ensure its success.

However, a higher price does not appear advisable when the target markets are taken into consideration. Young people are conscious of the price-value relationship and would possibly choose other models if they felt that they got the same degree of performance for less. Older adults and parents of children tend to be less interested in specifications, and the price would be their primary consideration. A product that is more expensive than others and does not have a brand or a history to support its claim of quality would not appeal to their sensibilities. Ultimately, the same pricing as the competing offerings would be the safe option that would likely generate some sales, while a lower price would be a riskier option that would potentially produce superior returns but be unsustainable or unpopular in case of failure.

Apple’s Example

Apple is a highly prominent and successful company that has remained a market leader ever since it pioneered the idea of a touchscreen phone. Its pricing model deserves inspection, as the use and combination of various methods employed by the manufacturer can help one understand how specific factors influence sales. Apple sells large numbers of iPhones despite their high price, with the company’s latest flagship model ranging from $999 to $1449, depending on the options chosen (“Buy iPhone XS,” n.d.). As was mentioned above, the sales of this particular model have been underwhelming, but it was still a significant success commercially.

Brand strength is a valuable component of popularity for a trademark that is as popular and widespread as Apple. The company is aware of the phenomenon and encourages it, assisting the people who engage in promoting its publicity (Ng, 2018). It further fosters loyalty by selling a broad suite of electronic devices and accessories that are designed to synergize, making switching an unpleasant and expensive process. However, it should be noted that the company does not use this phenomenon to increase profits by using higher price margins. As was mentioned above, if the company makes more money off an iPhone sale than it did in the past, the only reason is the phone’s higher price, as the markup percentage remains the same.

As a successful first mover, Apple spent a considerable amount of time as an undisputed market leader. The tendency persists to a degree, and the corporation remains a trendsetter and sets prices that it deems to be acceptable, which are then imitated by its competitors. Apple itself rarely takes other manufacturers into account due to the unique and isolated experience offered by its products, though the tendency may change as they catch up and outpace iPhones. Even then, if Apple chooses to embrace the identity of a premium handset manufacturer, it may employ the associated strategy of assuming customers have any amount of money to spend.

In the past, however, the corporation was aware that its prices were too high for the target audience it wanted to attract. As such, it employed carrier contracts to significantly lower the end cost in return for limiting the functionality of the phone. However, most people tended to stay loyal to a specific carrier network, and so the restriction was not a significant issue, making the approach a considerable success. The positive influence of the method can be seen in the popularity iPhones have attracted over the years, which has spread from the United States into most parts of the world. However, once carriers refused to renew the agreements for the new model, prices rose considerably, leading to worse sales.

It should be noted that Apple’s strategies are not always successful. The iPhone XR can serve as an example since, according to Kelly (2018), it was the only phone of the X family that did not sell out immediately. The price is a likely reason, as the phone costs $750 or more for a supposedly budget option, only $250 less than the flagship iPhone XS (Kelly, 2018). It is possible that the relatively small difference in price, which still left the XR among the most expensive smartphones available, led people to ignore the launch. People with enough money to afford an XS believed that there was no reason to go for a downgraded version, and those with strained budgets considered it too expensive.

Conclusion

Strategy

There currently exist three viable approaches to smartphone pricing: premium, affordable, and incredibly cheap. The first is exemplified by Apple, which is a world leader in smartphone manufacturing and sales and one of the largest companies in the world. It possesses enormous brand strength, which allows it to sell expensive iPhones and retain a loyal consumer base. It should be noted that the profit margins of the corporation’s smartphone branch are not increasing despite the growing price. Apple delivers a high-quality product that is supplied with the latest advances in hardware and software and often sets trends in the industry. The high value of the phones translates into a price that is only matched by a few, if any, competitors.

However, the premium nature can backfire if the product is not marketed as such, appealing to the public at large. Apple achieved the feat by offering the phones at lower prices than their cost would suggest, tying them to a specific telecommunications provider for a fee that would compensate the discount. The approach has stopped working recently, which marked a sharp rise in the prices of the latest iPhone models. The increase was answered with lowered sales as numerous consumers realized they did not want to pay such a high cost for a phone that did not have enough significant advantages over competing offerings. Apple’s approach has led to excellent results, but it is volatile, and its appeal is limited unless unusual measures are utilized to make the product more affordable.

Huawei provides a middle-of-the-road strategy, where phones are affordable and deliver high value for the cost. The corporation offers products that satisfy most of the needs of the average customer and provide additional features. At the same time, the devices are consistent in price and do not strain the financial capabilities of most people, particularly as the company provides a diverse range of offerings in different price categories. Huawei still primarily relies on its device sales to generate profits, prioritizing volume and word of mouth over maximizing the returns from every smartphone produced. The approach has led the Chinese company to become one of the world’s biggest phone manufacturers, creating sustained growth that continues to this day. The corporation offers other services besides selling smartphones, but it does not rely on them as much as the other ones that are reviewed in this paper.

Lastly, Xiaomi uses a unique strategy that utilizes smartphones as a means to promote the corporation’s other products. Each device is sold with a meager profit margin, which allows them to cost even less than Huawei’s offerings and display the same degree of quality. The company uses the positive reputation generated by its consumer-friendly approach to sales to foster loyalty and motivate further sales of accessories and uses of its customized software that is included with every phone. Those offerings are priced similarly to their market competition, but the trust cultivated by the smartphone sales motivates people to choose Xiaomi as their preferred option. However, Xiaomi’s approach may be as difficult to replicate as Apple’s since the corporation’s methods are enabled by its broad range of other products that have existed since before its entry and quick growth in the smartphone markets.

Creating Value in the UAE Market

The United Arab Emirates is among the world’s most progressive countries in terms of smartphone adoption. As such, they represent a profitable market for manufacturers of the devices due to the need to replace old products and the rapid advancement of the corresponding technology. In the scenario imagined for this study, a freshly created company would be seeking to enter the market with a new mid-range phone. The model would be similar to existing offerings, although it would have several distinguishing features. It would not be a premium phone because the first model would be an experiment to see whether the ideas behind the product are solid and appeal to consumers. As such, it would exist in a price-conscious environment, and the correct determination of pricing would be essential to its success.

The target markets for the offerings would consist of children and adolescents, young people, and senior adults. The first and third categories would be secondary markets, as, while concerned over price and functionality, they would be as likely to settle on the new product as any of its direct competitors. Young adults, on the other hand, are interested in fresh ideas and designs while remaining conscious of the cost-value relationship, which gives the new smartphone an advantage despite its lack of brand strength and consumer trust. It should be noted, however, that the literature consulted during the research states that these statistics are not significant determinants of consumer choice, giving the hypothetical company a further advantage. As long as the target market determines that the offering is worth the price requested by the seller, it is going to achieve sales and generate profits.

The strategy suggested for the smartphone is similar to that used by Huawei, as the other two methods described in this research would require expertise and resources that the hypothetical company does not possess. The Chinese corporation’s approach allows it to profit from smartphone sales directly and to offer still affordable phones that are popular with price-conscious population categories. Furthermore, the profits have allowed it to expand, and it is now capable of manufacturing competitive premium offerings. If the company can replicate Huawei’s success, it will not grow at the same rate as Xiaomi’s smartphone division or build the same brand power as Apple, but the method offers relatively low risk and does not require extensive prior resources to execute.

Limitations and Further Research Directions

A lack of specific information is the primary limitation that affects the accuracy of this research. Numerous companies inhabit the smartphone market, some of which are early movers such as Apple, while others are latecomers that did not necessarily start with the same amount of resources as Xiaomi. Furthermore, there are prominent successes and notable failures in the industry, with winners and victims including members of all categories. This research was limited to investigating three prominent market leaders with distinct and unique approaches, but numerous other examples can be followed but were omitted from the present investigation. A more detailed paper would investigate the circumstances of various companies that produce smartphones and their approaches to pricing.

The data on the United Arab Emirates smartphone market is also lacking. Demographic information such as the incomes and purchasing power of various population categories would be beneficial for the improvement of the accuracy of the results. The present research had to use data gathered in other countries to extrapolate results onto the inhabitants of the UAE, but there may be differentiating factors between the populations. The Emirates are characterized by a powerful and wealthy economy due to their abundant natural resource reserves, which may be reflected in higher average incomes and an inclination to purchase more expensive, more top-quality options. Data such as the prices and sales of various smartphone brands and models in the UAE would be significantly beneficial to the research, as they would allow for a determination of the specific preferences of the country’s citizens with regards to price ranges and adjustments.

Further research can address the concerns presented above or attempt to expand on the investigation in one of several ways. Inquiries into the specifics of the smartphone manufacturing industry and its approaches to pricing its products can be significantly beneficial to the understanding of its functioning. At the same time, research that concerns itself smartphone adoption in the United Arab Emirates can highlight important trends that allowed the country to achieve its high adoption rate of the devices. Another avenue of research is investigating the popularity of the same smartphone model when offered at different price points to determine the factors that motivate consumers to learn whether an offering represents excellent value for the cost. Lastly, it is possible to expand the scope of the study to include other Arabic countries to obtain a larger sample and investigate the changes created by cultural and economic differences.

References

Ameen, N. (2017). Arab users’ acceptance and use of mobile phones: A case of young users in Iraq, Jordan and UAE. Web.

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Chen, Y. S., Chen, T. J., & Lin, C. C. (2016). The analyses of purchasing decisions and brand loyalty for smartphone consumers. Open Journal of Social Sciences, 4(7), 108-116.

Global market share held by leading smartphone vendors from 4th quarter 2009 to 4th quarter 2018. (n.d.). Web.

Gordon, S. A. (2016). Why cheap phones are getting better and expensive phones aren’t [Blog Post]. Web.

Habbal, F. (2017). The smartphone technology acceptance among Emirati senior adults. International Journal of Applied Engineering Research, 12(20), 10114-10120.

Kelly, G. (2018). Apple iPhone XR sales are a surprising mystery. Forbes. Web.

Ng, M. (2018). Hundreds queue for iPhone XS and XS Max in Singapore a day ahead of launch. AsiaOne. Web.

Power Max P18K *new*. (n.d.). Web.

Primanto, A. B., ABS, M. K., & Slamet, A. R. (2018). A study of the best selling smartphone in the two biggest marketplace in Indonesia. Jurnal Terapan Manajemen dan Bisnis, 4(1), 17-24.

Rawal, P., Awasthi, A., & Upadhayay, S. (2017). Creating a hunger driven smartphone market by Xiaomi. International Journal of Engineering Science, 7(5), 11250-11255.

Ritchie, R. (2019). iPhone XS pricing — Was it too damn high? iMore. Web.

Saif, N. M. A., & Aimin, W. (2015). Analysis of Huawei’s smartphone marketing strategies in Arab world. Asian Journal of Management Sciences & Education, 4(1), 51-57.

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