Apple recently announced plans to sell iPhones and iPads on a subscription basis. In an ongoing effort to increase its $365 billion revenue, it's looking not to lure customers in with the latest enticing features, but by using Harvard's psychology of consumption to deploy strategic pricing.
The concept is that by getting customers to commit to a lower rate over a long period of time, you will retain more customers and rake in more revenue in the long run. In other words, it's not about what customers pay or even what consumers pay for, but how customers pay.
It's an investor's dream that would inherently drive revenue up while locking down customers. But in the case of Apple and its unique audience, it might be the one left paying the price.
The problem is that Apple is failing to match pricing strategy to consumer behavior. As Apple attempts to give its consumer base what they want, it overlooks why it's cult-like following actually buys it. It's not that the latest phone will change their lives compared with the next iPhone model. It's the thrill of the race and the exclusivity that comes along with owning the latest Apple devices.
In doing so, it's beginning to dilute its key selling points, which may later erode revenue.
Granted, the idea of paying for your phone in small(er) monthly installments may sound familiar. After all, carriers such as Verizon introduced this years ago in response to increasingly expensive cellphone prices. For example, Verizon sold the BlackBerry Pearl for $199 in 2006--one-third the price of the first iPhone the following year.
Verizon's version may be more like a loan than a subscription, but it effectively reduced major barriers for consumers by providing the flexibility to get out of a phone and upgrade to a new one as they are released--at a price they could afford.
Rather than using this pricing strategy to solve problems the way Verizon has, Apple is creating problems. First, its fan base of early adopters are those that love the thrill of the race to be the first to get the latest device. This eliminates that thrill, making the latest model more commonplace, and with that more mundane.
Second, carriers such as Verizon already offer this (more or less), so it's looking to do something that is already being done. And while there might be a case for Apple wanting to offer this directly, there's value in letting your distributors cash in on the sales of your products.
This psychological pricing strategy works because it effectively puts loyalty on autopilot. But studies looked at businesses like gyms and fitness centers, not consumer technology that people are already addicted to.
What the Harvard study looked at was two people signing up for a gym membership, one with annual billing and the other monthly. The total price per year is the same. Yet the person who pays monthly is psychologically more likely to not only use the membership more consistently throughout the year, but also renew their membership at the end of the year.
This is because when consumers are reminded of the price they pay month after month, they are reminded to use the services they're paying for. But no one needs a reminder to use their iPhone. If anything, people need a reminder to put their phone down.
The mistake Apple is making is rather than looking for a solution to a consumer pain point, it's setting its sights on increasing profits--something that can go hand in hand. Solutions and profitability should be in direct proportion, creating a mutually beneficial and symbiotic relationship. It's a tried-and-true method for long-term business success. It's how Warren Buffett makes business decisions, and it's what made Apple the first company to reach a $3 trillion market value.