What financial lessons can we learn from Apple's price hike on the iPhone 8?
The iPhone 8 is about to be launched, and provide us with an important lesson in personal finance. You see, the iPhone 8 is rumoured to be almost 50 per cent more expensive than its already costly predecessor. And yet, most of you are still going to buy it. Here’s why:
The iPhone 8 Will Cost More Than S$1,500
Based on the Forbes report, the most basic model (64GB) is expected to cost about S$1,346. The most expensive model (512 GB) is about S$1,616. Bear in mind, this is before we factor in costs like the GST. This would make the iPhone 8 comparable in price to many laptops.
In spite of this, Apple can remain confident of their phones selling well. What makes them able to extort you like this? Here’s what it comes down to:
- User inertia
- Price anchoring
- Apple knows their target demographic
- Apple knows they’re not just selling phones
User Inertia - the Hidden Cost of Buying Electronics
There’s a hidden cost to buying new electronics or apps, and that’s the “time investment”. You need to learn how to use the new device or app; and once you get used to it, you seldom want to change.
Plenty of Mac users find it unpleasant to to adapt to a PC, not because they’re “too dumb” to do it, but just because don’t feel inclined to make the effort. It doesn’t matter how much simpler Android has become; they won’t switch for the same reason that, say, many Wordpress users won’t switch to Tumblr. That creates a much greater tolerance for the iPhone’s high price.
On top of this, you won’t want your previous purchases to be sunk costs.
Consider how many apps you’ve bought, since you got your first iPhone. Then add in any iTunes products, like movies or music, that you’ve purchased. Next, consider that some of those apps - especially game apps - come with in-game purchases, which may not carry over to the Android version.
Most people aren’t happy at the thought of losing all those hoarded apps, even if they only actually use a tenth of them. That results in them buying another iPhone, and perpetuating the cycle.
Price Anchoring - the Power of Expectation
When does something become more affordable?
If you don’t understand sales and the psychology behind money, you tend to only have one answer: that’s when the price drops. But there’s another way too; that’s when you make someone expect a higher price.
Buyers already know that Apple products are not the cheapest in the store (Apple, by the way, has tight control over how its retailers price its products). As such, a S$1,600+ phone may not seem as outrageous for Apple as it would for other brands.
This is called price anchoring, and it’s one of the oldest strategies in the premium products market. It makes you willing to pay more, because the less rational part of our brains is bad at measuring objective value. If you were offered a Luis Vuitton bag at S$300, for example, your first instinct is probably to think that’s cheap - even if unbranded bags of similar quality are priced at S$60.
Whether something is overpriced is relative, and companies that target affluent users (like Apple) know how to take advantage of that. Which means that...
Apple Knows Their Target Audience
Apple knows the bulk of their customers can afford the price. That’s really all the justification needed to set the kind of prices they do. And one thing to know about the premium market, is that the sellers don’t want their products to be affordable to the wider public.
Ferrari knows a lot of people want their cars but can’t afford them, and Hermes knows loads of people want their bags but don’t have the purchasing power. Neither of those companies are crying over “lost business”. In fact, they like it that way, because it gives their products an air of exclusivity.
Since Apple knows it’s an affluent group they’re catering to, they can fully expect to bump prices up and still manage to sell. If you’re in Apple’s demographic, you’re not “price sensitive”.
In fact, this is so well known that some ecommerce stores raise prices for Macbook users.
Apple Knows They're Not Just Selling Phones
Apple doesn’t really sell phones, anymore than McDonald’s sells hamburgers. What Apple sells (and McDonald’s too, by the way) is a particular culture or lifestyle.
Mac fans are famously defensive of Apple products, and have formed whole communities. When you confront them about the possibility of cheaper alternatives, most fans don’t feel a need to rethink their purchases. Instead, they just feel attacked.
Apple’s ingenious marketing campaign, which positions their customers as being “different” from hordes of zombie PC users, is something a lot of people want to affiliate with.
The price of an iPhone isn’t just for the phone; it’s for access to the Apple fan club.
Android as a whole hasn’t got this; Android users have much less loyalty to a specific brand, and buy based on phone specifications, price comparisons, customisabilty, and so forth. That makes it harder to foist price hikes on Android users, whereas iPhone users are more likely to roll over and tolerate it.
iPhone Users Are Only Human
The point here isn’t to criticise iPhone users - afterall, we all make purchases that seem irrational to others.
Each one of us buy the things that make us feel good. For some of us, that could mean spending S$170 on a steak. For others, it could mean blowing over S$1,600 on a phone. Hey, you do you.
But it’s always good to step back from time to time, and be aware of just how well companies can push our buttons. That way, we'll understand ourselves better, which can deepen the enjoyment we get when indulging in our favourite brands.
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