Speculation is that Apple is due to launch a smaller and cheaper version of its iPhone just to sit alongside the current and upcoming breed of iPhones.

WSJ reported that the new iPhone - codenamed N97 -will be half the size of an iPhone 4 and will cost half its price. Apple sells iPhone to carriers at $625 a piece which is further subsidized by the carriers - with a 16GB iPhone costing $199 with a two-year contract. A 32GB iPhone 4 costs $299 with AT&T.

Apple's move to offer a sliced down version of iPhone follows its iPod strategy to have a range of products which covers all markets, price points and needs. Currently, Apple offers iPod in four different models -- the iPod shuffle, iPod nano, iPod classic and iPod touch. The product depth offers different iPods based on size, memory and touch features. The lowest price point offered is $49 for a 2GB iPod shuffle and highest price charged is $399 for a 64 GB iPod touch.

The two key strategies that Apple is following are skimming and versioning.

Skimming:

When Apple launched its first iPhone in June 2007, it priced its 4GB model at $499 and 8GB model at $599. However, just two months after its launch, Apple reduced the price of its 8GB model to $399 and discontinued its 4GB model.  Apple's move to slash the prices was to gain volumes by gaining mileage among the mainstream buyers rather than just early adopters. Volumes offer the potential of economies of scale which, in turn, offers cost advantage to manufacturers.

Also a report titled Apple's Pricing Strategy issued in 2008 charts the price reduction strategy followed by Apple for iPod classic since its launch. In 2002 a 10GB iPod classic cost $399; in 2003 and 2004 it priced its 10GB iPod at $299 and $249 in 2005. Currently a 160GB iPod classic costs $249. Also Apple continued to sell its older version of iPods while selling the newer version.

Thus, Apple followed the strategy of consistently reducing the price of a particular model while simultaneously increasing the size of its memory, besides launching new models at cheaper prices. Thus, the new 16GB iPod nano costs $179 while the earlier version released in 2007 had a price tag of $199 for 8GB.

Thus Apple is due to follow a similar skimming strategy for iPhone. The report of a new smaller iPhone is close to Apple's skimming strategy, and thus, a smaller variant to target the mainstream users and not just a category of early adopters is vital to Apple gaining volume.

Versioning (Pricing Discrimination):

Apple follows versioning as a strategy by releasing multiple versions of a single product and charges different prices for these versions, increasing its product depth. Hence, it offers an iPod with varying features targeted at customers segmented on the basis of price they are willing to pay. A user has an option to buy a $49 iPod shuffle or a $399 iPod touch. Versioning strategy is usually followed in markets where companies have short-run market power like the smartphone market where Apple is facing competition from Android, BlackBerry, WP7 and webOS-based phones. Since Apple's market leadership is challenged by these phones, it has skimmed the market with high price in its initial years with its iPhone priced at $399 but now it is aspiring to launch a smaller iPhone to gain a wider customer base.

Apple with its smaller iPhone will be able to gain the market share which Nokia currently rules, especially in the feature phone market.

Switching feature phone users to iPhone:

By offering an iPhone at $99 Apple can steer customers away from feature phones to smartphones. Since Apple's product strategy is to induce its current customers to move to higher margin products, a cheaper iPhone will grant an entry to new buyers into its ecosystem. Also coupled with iTunes, it can keep the customers locked into its ecosystem and even drive them slowly to a higher margin iPhone.

Cloud Storage:

WSJ report also states that Apple is looking to revamp its MobileMe online storage service. Since Apple cannot offer higher internal memory on cheaper iPhones, it can leverage its cloud-solution, MobileMe the online storage option to expand its smaller iPhone's potential. Cloud-computing currently also allows users to run applications which require more compute power in the cloud, thus reducing the requirement of heavy processing power in mobile phones.

Whether Apple will add such an option is not confirmed but enabling its users to store data in the cloud will keep the customers within its ecosystem. Also by using iTunes for management of data on Apple devices, users get accustomed to Apple's walled-garden environment. It offers the option of accessing information on iTunes through multiple access points or devices, thus, making migration of users to devices like iPad and Mac OS X devices easier.

While the market is awash with reports of a smaller phone, Apple's core product and pricing strategy makes such a development imminent.