There is perhaps no more committed customer base than Apple’s consumers. The latest iPhone is as much a luxury item as you can find in the smart phone market. Its top model is tagged at $850 (without service contract) at the top of a smart phone market that reaches down to $150 in the U.S. Its consumers are high-mid to high end income earners, as well as many purchasers who really cannot afford to buy it, but are impelled by aspiration to add this item to their personal debt.
The growth rate of iPhone sales in the U.S. is declining because of stiff technology and brand competition from Samsung. Apple’s iPhone has a 34% market share in the U.S., followed by Samsung at 32 percent. LG trails with 9% and a pack of other brands make up the remaining 25% of the smart phone market. Two companies control 66% of the market and Samsung is likely to edge out the iPhone because it has a broad line of low price point smart phones available for growing mass purchase, as people switch from feature phones to smart phones. In the 4th quarter of 2112, Apple and Samsung edged up 4 share points to 70% of the market.
While Samsung produces many different models at different price points, Apple improves the iPhone and continues to produce earlier generation models and sell them at discounted prices. This kind of choice comes at a brand strength cost, since it is like a hand me down from someone who can afford to buy a new model. How long can brand strength be sustained by growing numbers of second class citizens? This strategy requires rapid elite replacement of earlier models. It is a top down innovation strategy that requires costly R&D, expensive creative marketing and an aura of charismatic executive leadership.
iPhone sales are rapidly growing among the rich all over the world. Sales in China are soaring because the iPhone has barely touched the tip of the vast Chinese iceberg of wealthy consumers. It has 7.5 % percent of the smart phone market and trails Samsung and many domestic makers that sell lower price smart phones. IPhone has 5% of the India market, versus Samsung’s 40%. Eventually, however, Apple’s strategic problem of saturating the high end market and facing a declining rate of sales growth sales will catch up with its circumstance in the U.S.
In order to lift U.S. and global sales growth, it is reported that Apples will introduce in 2013 several new low cost smart phones in the $99-$250 range, without service contracts. These are not earlier generation hand-me-downs, but new designs with fewer features, functions and good looks.
Is this a wise strategy from a customer commitment point of view? iPhone loyalists are committed to Apple for its innovation in technology, features and design. This has been the life story of the company. Apple never made plain vanilla products for the mass market. So the Company faces many dilemmas in launching new cheap models.
Will they call the cheaper models iPhones and jeopardize their innovative identity to top tier loyalists? Will high end consumers buy $850 iPhones when people around them have a $150 iPhones? Luxury brand strength generally diminishes when it goes downstream. This happened to Mercedes, Tiffany’s, and a host of luxury fashion brands. The trade-off is always that what is lost in premiums is offset by volume. But this does not always happen.
If Apple does not call its new low cost smart phones iPhones, what we they call them and why will people buy them over a slew of alternatives that may have more features at the same price. Lexus succeeded as a new brand name because it presented a Toyota luxury product that had Mercedes quality at a low price. A new cheap Apple smart phone may have less value than competitive Samsung and LG phones at the same price.
My view is that Apple should keep to the high road, keep investing in innovation and breakthroughs and stabilize its high premium share in the U.S., while advancing in high end sales to the rapidly expanding global middle class of developing markets. Keep the faith of well-to-do committed customers who are always waiting for Apples’ next innovation adventure. There is no excitement in low price models.
Mlton Kotler
March 17, 2013