This article is by Robin J. Tanner, associate professor of marketing at the Wisconsin School of Business at the University of Wisconsin at Madison.
With the iPhone 8 and 8 Plus now on sale and the iPhone X up for preorder on Oct 27, the critical issue facing Apple is how demand will play out across the entire lineup. Likely due their intense need for secrecy, Apple is believed to do little if any qualitative research to learn how customers will respond to new product offerings. Moreover, since they have never gone to market with a three-premium-phone lineup before, historic sales data is likely of only limited usefulness in predicting the sales mix. Thus, the reality is they face considerable uncertainty in what demand will look like. When this demand picture does emerge, it may disappoint.
Put simply, there seems a genuine possibility that we are witnessing a rare marketing misstep by Apple. The potential problem is that the allure of the X dramatically weakens demand for the 8 and 8 Plus, and with the X itself rumored to be in scarce supply, total iPhone unit sales might actually be lower than if the iPhone X was not in the lineup at all. How could this be?
Consumer psychologists and sociologists have several theories that can help us think about how customers might choose among these three phones. One theory, which is very intuitive, is referred to as the compromise effect. This shows that when considering multiple products of varying degrees of quality and/or price (say an iPhone 8, iPhone 8 Plus, and iPhone X), many consumers will compromise and choose the middle product.
This tendency can actually be used strategically by marketers. Imagine a simple example where you are a TV manufacturer who sells two products, a $500 50” TV and an $800 60” model. Now let’s assume that because it is higher margin, you wish to drive demand to the 60” version. One strategy is to launch a third TV, perhaps a $1200 70” model, merely because you know that its existence will lead consumers to compromise on the 60” version, which now becomes the middle product in a set of three. Such a compromise effect would likely be a great outcome for Apple with their new phone lineup. That is, versus the situation of just offering the 8 and 8 Plus, the addition of the iPhone X might actually lead people to compromise on the (quite possibly higher margin) 8 Plus, increasing its relatives sales versus the vanilla 8 phone.
Of course, the reason the 8 Plus would be a potential compromise relates to its position in price/quality space versus the other two phones, i.e. the 8 Plus is weaker on design and functionality than the X, but has a better price, and vice versa compared to the vanilla 8. But what if many consumers don’t think of the set of phones like that, and instead simply view the iPhone X as being an entirely superior option despite its higher price? Well, if that were the case then we can rely on another piece of psychological theory which tells us that consumers love to buy a product that dominates one or more other products. Domination is perceived when a product is seen to be superior to another product on every attribute. For example, in the original TV scenario above, imagine what would happen if the manufacturer added a $900 55” model. Compared to the 50” model, this TV beats on size but loses on price. However, critically it’s both smaller and more expensive than the 60” model. Thus, the 60” TV dominates this new model. What the research shows us is that the existence of the dominated 55” model (sometimes referred to as a decoy product) would drive relative demand to the 60” model because consumers like the fact that it dominates another product.
Of course, at first blush we would presumably not expect the X to dominate the 8 or 8 Plus. While it benefits from arguably the biggest external design change in iPhone history (bezel free, no home button), and has a depth sensing front camera enabling potentially breakout features like Face ID and animoji, the fact remains it costs significantly more and is thus clearly inferior on the critical price attribute.
However, the risk for Apple is the possibility that a significant number of consumers will turn out to be considerably less sensitive to price than they expect. Why might this be? Well, originating in the seminal 19th century work of the sociologist and economist Thorstein Veblen, we know that consumers sometimes buy products not for their innate functionality alone, but to signal their wealth and status to others (think a Louis Vuitton handbag or a Rolls Royce). At the extreme, such conspicuous consumption can potentially lead to an upward sloping demand curve, that is increasing price actually fuels demand.
While I do not suggest that the new iPhones (specifically the X) meet the definition of such Veblen goods, I am suggesting that in addition to their central role in our lives functionality wise, the status high-end smartphones confer makes a significant number of consumers substantially less sensitive to price than they are in any other product category. As such, these consumers may in fact perceive the iPhone X to dominate the iPhone 8 models. By this account, rather than the 8 Plus being perceived as a compromise choice, both iPhone 8 models instead serve as decoys making the iPhone X seem even more desirable than if it were Apple’s lone premium phone offering, potentially leading demand for it to be dramatically higher than Apple expects. If this demand for the X cannot be met, then total near term iPhone sales will clearly surprise on the downside.
In my view, Apple’s branding of the new phones has actually increased the likelihood of this scenario playing out. Phil Schiller, Apple’s senior VP of marketing, remarked to Apple blogger John Gruber that they spent a very long time considering how to name the phones. The risk is that their ultimate decision to brand the high-end phone as the iPhone X (and note Apple verbally refers to the X as the ten, not the ex) essentially implies to consumers that it is two generations ahead of the iPhone 8 models. In my view, this increases the likelihood that consumers perceive the X to dominate the other phones. Put simply, if you are a status oriented customer shopping for a new iPhone, why would you even consider the iPhone 8 when it will be two generations behind the moment you take walk it out of the store? My advice to Apple would have been to brand the X as being a member of the same iPhone 8 family (e.g. iPhone 8 Pro, iPhone 8 Edition, or even iPhone 8 X) as the X would then be less likely to be perceived as dominating the other two phones, and the 8 Plus would have more chance to be perceived as a compromise option.
As it is, in the months ahead I expect Tim Cook will be using endless superlatives to describe iPhone X demand, but a lot fewer when addressing forecasts of total iPhone unit sales.
