Is Apple playing the behavioral economics game?

by Nigel Hollis | September 18, 2017

Apple’s iPhone X is now a reality rather than the subject of rumor and, yes, it now has facial recognition, an all-screen design and a significantly faster processor. While commentators debate whether the iPhone X really is the “biggest leap forward since the original iPhone” it seems clear to me that the primary objective of the launch is to set a new price benchmark for the iPhone range.

Price anchoring is a well-known cognitive bias by which people’s perception of value for cheaper options is influenced by the highest known price. In my book Brand Premium I noted the use of this anchoring effect on VW’s Golf. The introduction of a limited range of R32s at a substantially higher price point made the price of the GTI look that much more acceptable. (I should note that the R32 has now been replaced by the R with a 2 liter TSI engine rather than the 3.2 liter V6 but the anchoring effect is the same.)

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As noted in the Marketing Week article Apple is also introducing the iPhone 8 and 8 Plus, which are essentially updated versions of 2016’s iPhone 7 and 7 Plus, and lack the all-screen design of the X. This takes the iPhone range to a total of 8 available models. The iPhone X anchors the range at the top end at $999 and the SE is the most accessible offering at $349. This is a textbook strategy (if Brand Premium can be considered a textbook) of ensuring that a brand is as accessible as possible (without undermining margins) and will no doubt stand the iPhone in good stead in India and China. 

While the difference in features and functionality between the X and SE are obvious I do wonder whether the trade-offs between the intervening models is clear enough. A key principle of branding up or down is to make sure that people are giving something up by opting to buy a cheaper model. Is wireless charging going to be enough to separate the 8 from the 7? (Yes, I know the chip is different, but unless Apple can make that difference tangible I suspect it will not be enough to swing a sale for the more expensive model).

I am sure that many people had high expectations of the iPhone X, this year’s BrandZ data finds that compared to the average brand ‘excited to see what they do next’ indexed at a massive 152 in the UK, 150 in the U.S. and 135 in China. Even if the new features are not enough to justify the $999 price point I suspect that the availability of the cheaper models will keep many potential buyers in the iPhone fold instead of jumping ship to Samsung. But what do you think? Please share your thoughts.

7 comments

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  1. Nigel, September 24, 2017

    Thanks for the comments everyone.

    Luis, I have questioned how long Apple can go on charging a premium for some time but, guess what, they still keep proving me wrong. Maybe this time? 

    Leon, sadly, this strategy might work in the short-term and then the brand becomes hostage to selling more volume to avoid laying people off, ends up discounting, losing margin, which means they finally end up laying people off anyway.

    David, thanks for reminding us that a brand should be measured by the price it can command compared to similar alternatives not just how much it sells!

  2. Luis Miranda, September 20, 2017

    I think Apple is doing it all wrong. They are exceeding the product pricing and not just for the iPhone X, they have increased all their prices for a long time and I don’t think they worth that much. They have generated that the category follows and if we compare cellular phone price vs smart phone price is an incredible increase and they keep doing it. Smartphones are more expensive than a PC and I still don’t understand why they think that they can charge more for cooler screens, cooler cameras and cooler ways of charging it… it simply don’t worth it. A lot of people and close friends were always willing to pay for iPhone price when they were around $300-400, but they are not willing to do it longer, this prices are perceived as “unreachable”.

    From a marketing point of view, I think the situation is worst. They charge more to products that don’t offer more than 1 year of warranty, of course they are not ensuring quality. Clearly the company has stablished a financial focus (I think since Steve Jobs left this world) and we can notice this not just on the product pricing but on the additionals like changing the plug-ins, the chargers, maintenance, headphones, etc. but most of all the ridiculous strategy of selling available memory/space and doing all the operating system upgrades heavier and heavier.

    It’s sad to see how a love brand (at least I really loved Apple) to a brand that you can even hate at some point. In my case they have already lost me, the moment I try the competitor brand and prove it works and I can easily change my “life platform” to them, Apple loses me (clearly this is the strategy that I hope Samsung has already identify) 

  3. Apoorv Tripathi, September 20, 2017
    This is an classic example of cross elasticity.. where a price of one good influences the sale of second. 
    Though I think, its more about brand loyalty that iPhone has created and high end specs that it provides.
    I use neither Samsung nor iPhone but my friends do and I can tell you iPhone is far superior than Samsung in every sense. 
  4. Madan, September 19, 2017
    I believe that Apple does play the behaviour economics game, but the users of apple have bought into the ecosystem and are likely to flirt around with either the 8 series of X - depending on whether they are on the original or S" purchase cycle. Same old pattern repeating with a percentage jumping to the X. However, the 8 series is one of the poorest of upgrades they are offering, with literally no new feature that can be a hero - so the chances of people either holding on to their iphones or switching to X is likely. Looks like this one might backfire on Apple.  
  5. Ed C, September 18, 2017
    Well said, I agree the strategy seems more of price anchoring than anything else. I just watched its intro video, which was cool, and does position the brand pushing the boundaries, so buyers of the under-X's will still feel good about their purchase.
  6. Leon Shears, September 18, 2017
    What they could do, of course, is to lower the price (they make enough money already!), sell more volume and thereby give more people jobs. The volume will give them the cash margin and they can sleep well at might knowing they are doing something for the community.
  7. David Newman, September 18, 2017
    There is a big price gap between the prices of Chinese phones and the big brands sold in the USA and UK. A quick search on eBay finds some excellent phones at £50-100. So the rest is a brand markup. I am not sure how long the gap can be sustained.

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