The economics of iPhone pricing
Apple's surprising misstep on iPhone pricing could have come about because the company's executives took too many economics classes, and not enough psychology courses.
Earlier this summer it seemed Apple could do no wrong on the marketing and public relations front, but the company clearly did not foresee how its early adopters would react to the $200 drop in the price of the iPhone announced by CEO Steve Jobs last Wednesday. Steven Levitt, the man behind the book Freakonomics and currently writing a blog of the same name at The New York Times, has an interesting post today about the iPhone pricing flap and its probable causes. (Thanks, Daring Fireball).
Maybe Steven Levitt's next book will touch on the reaction to Apple's iPhone pricing moves.
(Credit: Freakonomics.com)Simply put, Levitt said it's solid economic practice for a company to charge as much as they can for a coveted new gadget, then lower the price over time as the early demand wanes. The problem is that people aren't stupid, and they can tell when a company is very clearly eyeing profits over the customer experience: that's where Apple misfired.
There's nothing fundamentally different between an iPhone sold June 29 for $599 and one sold yesterday for $399. There is some sentiment that with the introduction of the $349 iPod Touch, Apple needed to give people more of a reason to buy the iPhone, which uses almost exactly the same interface. As interesting a device as the iPod Touch is, however, it's not a phone.
Had the company come out with a different or better iPhone at around $599 and then lowered the price on the original, the early adopters probably would have found that easier to swallow. "A new, updated product makes it seem like the company is learning how to make iPhones better, so it would thus be easier for consumers to accept a price cut on the original," Levitt wrote.
Apple arguably has a more loyal base of early adopters than any other company in the tech industry. In January, in the pre-dawn hours outside San Francisco's Moscone Center, several of those waiting in line for Macworld declared unequivocally that they would buy an Apple-designed cell phone without knowing what it looked like, what it cost, or even whether or not it was real. But they too, have limits, although I'd bet the outrage mostly subsides by the next time Apple makes a major product launch--$100 store credit or not.
Tom Krazit writes about the ever-expanding world of Internet search, including Google, Yahoo, online advertising, and portals, as well as the evolution of mobile computing. He has written about traditional PC companies, chip manufacturers, and mobile computers, spending the last three years covering Apple. E-mail Tom. 
Remember that Apple set the price six months before a single
iPhone was sold. That is, before it really knew what the final
costs would be. The unit costs of an item that sells a million
units is substancially lower than one that sells a quarter of that.
There were dozens of stories in that six months saying that the
iPhone was over priced when it turned out to be $250 to $400
cheaper than other Smart Phones when they were unlocked and
unsubsidized. When you added in costs for the two year service
contract, the iPhone was $150 to $750 cheaper than other Smart
Phones.
I think that where Apple miscalculated was they were used to its
usual Mac Base. We rarely complain when Apple surprises us
with a price decrease or a product improvement.
That's just the way Apple acts. It's a secretive company and they
often surprise us just after we have bought something from
them. Apple expects us to be mature adults who know the game.
For example, Apple decreased its price on the 24 inch iMac
recently by three hundred dollars while improving its specs.
Were there people who had bought the month before; hence
were ineligible to return it? Sure. Did they whine publicly about
it? No.
But, the iPhone is a new product that is sold to a general
audience, not to the Mac Base. So, Apple got a bunch of
complaints.
Since Apple is branching out more into consumer electronics, it
needed to learn this lesson. I don't think it will make this
mistake again.
the whining on the new iPods ranging from 'pricing' tot 'memory'. I
always wondered at such whining. I mean, if you are not happy with
it, don't buy it, right? Yet they don't suddenly flock to River or
Zune, now, do they?
- by sunyanhk July 27, 2008 6:51 AM PDT
- Apple is always good at marketing. Other than the good innovation of iPhone itself, iPhone has changed the landscape of telecom industry. This is a good lesson for those tech-kie in telecom industry to learn.
- Like this Reply to this comment
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(4 Comments)iPhone 2G has never been sold officially in Hong Kong . All iPhones 2G in HK are parallel imports. We all know it. The traditional product life cycle of telecom products is short (half a year?) and the price will drop when the PLC is at maturity stage. We learn it from marketing class.
iPhone changes this theory. All iPhone were from AppStore and they were locked. Also Apple only co-operate with one teleco in each country. The introductory price of 8Gb 2G unlocked iPhone in HK at early launch (version 1.11) was about HK$4,000 (parallel imports). I expected the price will follow the traditional intelligence and will drop. However, it was wrong! The price was increased nearly to HK$6,000! Why?
.... go to my blog http://hk.myblog.yahoo.com/sunyanhk/article?mid=51