Apple is raking in the profits with its Apple Watch Bands, according to a report from IHS research. In one case, an entry level sort band that sells for US$49 costs just $2.05 to make. Many factors likely come into play in this pricing decision.
Previously, we learned that the Apple Watch Sport costs under $100 for Apple to make. That report came from the research firm IHS. On June 18, IHS published additional information on the cost of making the Apple Watch bands.
According to a Reuters report, the sports band costs only $2.05 to make. Extensive information about the other kinds of bands was not divulged.
It's well known that the industry's retail price to manufacturing cost ratio typically runs about 4:1. So if a product costs $10 to make, it will sell for $40. This covers things like the cost of doing business, QA, packaging, shipping, advertising, warranty replacement and so on. In the case of the Apple wrist band cited, the ratio appears far higher.
There are several factors that come into play here. The first is that Apple spent serious money on Apple Watch R&D, and it would like to recover those funds. One way to do that is with the watch itself, but another opportunity presents itself in the bands.
Next, Apple planned for the door to be open to other developers to offer their own bands and knew that it would be a good idea to set both a design and price standard before its own revenue flow would be impacted.
In addition, despite Apple's traditional public image of confidence, the Apple Watch success could not be guaranteed. There was risk involved. As a result, it would have looked very bad for Apple to lose money on a product that failed in the marketplace. A healthy markup for the watch and its low cost bands helps to mitigate that risk as well as even out costs for the other more expensive bands.
Finally, in the luxury watch market, customers expect to pay a certain amount of money for certain premium brands and the associated wrist bands. For Apple to sell its own bands for significantly less than the competition would raise questions about the quality of the bands that need not come up. It's better to flow with the industry trends.
The overall Apple Watch and band pricing hasn't put a damper on demand or kept the estimated 2.7 million customers from purchasing one as of mid-June, and analyst projections for total sales in the first year are at about 14 million.
All in all, Apple's markup here for the bands seems more like cost recovery, risk mitigation and alignment with industry pricing as opposed to a blatant ripoff.