Capital Ideas Blog

A cheaper iPhone could trip up Apple

By Pradeep K. Chintagunta

From: Blog

This post originally appeared on the Kilts Center Faculty Blog

Rumors are swirling that Apple may introduce a “less expensive” iPhone perhaps as early as this year. There are some good reasons for Apple to do this, but it also presents a major marketing challenge that, done wrong, could trip up one of the business world’s greatest success stories.

The argument for a cheaper phone goes like this. Subsidies soften the sticker shock associated with higher-end smartphones—paying $199 for a top-of-the-line device (albeit with the 2-year contract lock-in) is to many people more appealing than paying almost $700, or close to the price of a computer. But in a number of countries with rapidly growing cellular phone subscriber populations, service providers do not provide handset subsidies.

In countries without subsidies, Apple’s competitors, notably Samsung, have benefited tremendously from having a product line that includes devices at various price points.

In principle, Apple has a diverse product line, as the iPhone 4, 4S, and 5 all sell for different prices. But in reality, when these devices are sold at full price, they’re all likely out of the reach of these countries’ consumers. Therefore to better serve the needs of such consumers, Apple could introduce a lower-end device. Further, if these customers are satisfied with their iPhones, they might be willing and perhaps able to trade up to higher-end Apple products later on. Japanese car manufacturers in the US have already demonstrated the ability to succeed with such an approach.

From this short-term customer perspective, the case can certainly be made that Apple should release a lower-end phone. To paraphrase Shoeless Joe Jackson in Field of Dreams: If Apple builds it, customers will come. Even in core markets such as the US, technology products such as the iPhone are subject to the effects of the product life-cycle. This means that as a market matures, later adopters are likely to be more price-sensitive and demand a greater variety of options. Apple may be able to attract these later adopters with the new device. And as service providers such as AT&T and Verizon try to wean consumers off of subsidized handsets, the ability to offer an iPhone at a reasonable price will certainly come in handy.

But this argument is not one-sided, and there are reasons for Apple to consider staying away from a lower-end phone. The foremost among these arguments: What would such a product do to the Apple and iPhone brands? Apple’s strength thus far has been to get consumers, those willing to pay higher prices for better quality, to keep coming back for each new version of the phone. As long as these consumers have seen innovation in the next-generation device, they have been willing to pony up for the frontier product. Forrest Gump’s mamma’s words—“Life is like a box of chocolates. You never know what you’re gonna get.”—has not applied to Apple products. This strategy has helped the firm maintain its premium and innovative brand associations and preserve high margins even in the face of intense competition. Moreover, a lower-end iPhone could cannibalize sales of Apple’s higher-end products.

Given this environment, announcing a lower-end product in isolation does not seem like a good idea, especially as it would come on the heels of another incremental innovation—the iPad Mini, which Apple debuted last October. However, if Apple were to announce a lower-end phone and also a next generation, top-of-the-line iPhone that would appeal to the core and loyal customer base, that would mitigate potential adverse effects. It could even serve to strengthen the brand, given the benefits I’ve described. Further, if the higher- and lower-end products were well-differentiated, the cannibalization problem could be significantly reduced.

Ultimately, Apple needs to be true to its core positioning in order to ensure sustained performance. Going downscale would make Apple appear more like its rivals, making it more “Me Too” than “Think Different.”  Preserving its sway at the high end of the market is fundamental to the future success of the brand.

There are lessons here for firms positioned at the top end of a market: If you expand the customer base into new markets, don’t take your eyes off of the core customer. In Apple’s case, this will require a continued commitment to innovation that has helped the company over the past several years. Clearly, this is easier said than done, but competing in technology markets is no cake walk—or box of chocolates, for that matter.


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