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Why Buyers Will Be Spending More For the iPhone 7

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Apple CEO Tim Cook announces the new iPhone 7 during an event to announce new products Wednesday, Sept. 7, 2016, in San Francisco. (AP Photo/Marcio Jose Sanchez)Marcio Jose Sanchez — AP

When Apple introduced the iPhone SE at just $400 this spring, the company was effectively making available its newest and best phone features for $250 less than it typically charged. Although the SE had only a 4-inch screen, the device contained the most recent versions of Apple’s A9 controller chip, graphics processor, and cameras.

The move had a predictable impact on iPhone sales—it helped to increase the number of phones sold but sent their average price plummeting. In Apple’s most recent quarter, the average price of iPhones was just $595, the lowest in two years.

Now, Apple needs all the sales volume it can muster. IPhone sales had never declined year over year until the first three months of this year, but they have now dropped for two straight quarters with further declines expected for the rest of the year. But the company is also seeking ways to convince buyers to spend more, longtime Bernstein Research analyst Toni Sacconaghi noted in a report on Wednesday.

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Those tactics include one outright price increase. This year’s 5.5-inch screen iPhone 7 Plus costs $20 more than last year’s 6S Plus. But Apple (AAPL) also made a few more subtle moves that will have the effect of nudging buyers to spend more.

For one, it put unique top-of-the-line photo gear only in the Plus model this year. Only people who opt for the more expensive 7 Plus will get a second rear camera providing a telephoto feature and the option to blur backgrounds. The cheaper 7 model has just one, standard camera on the back. Also, Apple introduced a new, super shiny black exterior finish for the iPhone body, but only made the “jet black” option available on more expensive 128 GB and 256 GB models, not on the entry-level 32 GB model.

As a result, more buyers are likely to purchase the plus model and for higher storage configurations this year, Sacconaghi says. About 40% of iPhone 7 buyers will opt for the plus-sized model versus an estimated 29% opting for the big screen in prior quarters. And about one-quarter of buyers wanting jet black will buy a 128 GB model instead of the 32 GB model, adding several percentage points to the overall share of the more expensive, higher storage models.

Apple should also be helped because the SE will be a much lower proportion of sales now that the upgraded 7 line is out, Sacconaghi added. On the other hand, by upping the minimum storage configuration on the iPhone 7 to 32 GB from 16 GB, Apple is making it easier for some buyers to stick with the entry-level model, he noted.

For more about the new iPhone’s features, watch:

The bottom line is that the average price of an iPhone should reach $679 for the all-important holiday quarter, Sacconaghi calculated, short of the $691 in the same period of 2015 (before the cheaper SE model had come out). But it is a 14% improvement from the $595 average last quarter.

“We believe iPhone 7’s product line-up is poised to strengthen Apple’s (average selling price) – all else being equal – through its price increase on the 7-plus, higher storage configurations on its ‘jet black’ offerings, and an expected mix shift to the 7-plus due to its enhanced functionality,” Sacconaghi concluded.