iPhone 5c: The Slippery Upsell

It seems as if nearly everybody has had something to say about the pricing of Apple’s new iPhone 5c. One of the most insightful posts on the topic is by Ben Thompson. He makes a good case that Apple's choice of $549 unsubsidized / $99 with contract is the right choice for their business (despite what most pundits believe).

1. Apple believe the iPhone 5 is the standard for “good enough” and won’t produce a “new” iPhone below that level. That means higher prices this year
2. Apple’s “best” markets are the American-style ones, for reasons beyond simply subsidies. Thus, it makes sense for them to optimize pricing for those markets – i.e. $550/$99
3. Expanding a product line is best done incrementally to ensure you are not leaving money on the table. You can’t have a high-end and low-end with nothing in the middle

Apple simply can't afford to price the iPhone 5c lower without risk of losing some part of the lucrative carrier subsides and leaving a pricing gap in their product line.

The question many fewer people have been asking is why Apple chose to create the iPhone 5c in the first place. John Gruber observes:

The iPhone 5C has nothing to do with price. It probably does have something to do with manufacturing costs (which are lower for Apple), but not price. Apple’s years-long strategy hasn’t really changed. They offer three phones:

1. This year’s, with the latest technology.
2. Last year’s, starting $100 lower.
3. The two-year-old model, with meager storage, free on contract, $200 lower unsubsidized.

It’s just that instead of putting the year-old iPhone 5 in slot #2, they’ve created the 5C to debut in that slot. The 5C is, effectively, an iPhone 5.

What changes with the 5C is that the middle tier is suddenly more appealing, and has a brand of its own that Apple can promote apart from the flagship 5S.

In marketing, what looks new is new.

It is clear that the iPhone 5c is about marketing. Apple selected the ad for the 5c to run during the keynote and is featuring the 5c most prominently on their web site. As Ben noted, this is the first year that last year’s technology remains “good enough” to warrant a “new” design that can be actively marketed without tarnishing the brand.

Now that it is, Apple is able to reap significant advantages by replacing “last year’s model” with a new design:

1. The price-to-entry for a “new” iPhone is half of what it was previously in subsidized markets.
2. They can return to a youthful, hip, “colorful” appeal in their marketing without compromising the affordable luxury status of the flagship 5s.
3. Margins on the middle-tier device will improve through reduced manufacturing costs
4. Moving customers up through the price tiers becomes much easier than it previously had been.

The last point is something that deserves much more attention that it has thus far received. I believe the iPhone 4 continued to sell much better than Apple expected over the last year. A primary role of the 5c will be encouraging customers to choose a new iPhone (whether 5c or 5s). There are two steps up in Apple’s iPhone product line and both are significantly more enticing than they previously had been.

The step up from free with contract to $99 with contract was destined to be more attractive than in past years as the iPhone 5 already had a larger screen. By adding redesigning the external appearance of the iPhone 5 Apple has made the middle of the line feel fresh for the first time. The choice is now between a 2-year old iPhone and a “new” iPhone. I believe we will see many more buyers move up to the 5 from the 4s than moved up from the 4 to the 4s. This is at the heart of why Apple created the 5s.

But that is not all. The step up from the iPhone 5c to the iPhone 5s is also much more enticing than the step up from an iPhone 5 to an iPhone 5s would have been. The appearance of the iPhone 5 and 5s is nearly identical. Both are able to project the “affordable luxury” feeling. By not offering the iPhone 5 at a reduced price Apple is creating a significant incentive for buyers who appreciate this to move up the line. Many who would have been satisfied with a $99 iPhone 5 will step up to the $199 iPhone 5s rather than settle for the more “youthful” pop culture iPhone 5c.

Of course these upsells will work even better in unsubsidized markets where customers will be comparing $449 with $549 or $549 with $649. A $99 difference is much less significant when the consumer is considering the full retail price of the iPhone.

By introducing the iPhone 5c, Apple has created a lineup where each step up is very strongly differentiated from the step below. A very slippery upsell indeed.