The Behavioural Economics Behind an iPhone

BY SOUMYA RANA

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Steve Jobs released the first iPhone in 2007 and since then, more than 33 iPhone models. Currently, there are more than 113 million iPhone users, that’s about 47% of all Americans.

Steve Jobs with the first iPhone

The latest iPhone 13 has gone on sale at a price of US $899 for 256 GB. But why are people willing to pay hundreds of dollars for a phone and why is Apple charging so much?

The answer is behavioral economics.

Queues outside the Apple store for iPhone 13

Behavioral economics behind an iPhone:

Behavioral economics involves psychology and human behavior in economic decisions, explaining why individuals behave the way they do. Apple is trying to maximize their revenues by setting high prices. People who wish to have the latest technology and the newest model would happily spend hundreds of dollars. Essentially, once Apple has sold the phone to those willing to pay the most for it, it can then capture the rest of us by reducing the price over time. As prices go down in a few months, we find value in the iPhone. This is known as price anchoring as the goods suddenly don't seem so expensive.

• Economics explains this behavior through marginal benefit. If one is not ready to pay $899 for a new iPhone, that is because upgrading doesn’t outweigh the marginal benefit or the satisfaction/utility of the current smartphone.

• Individuals who are uncertain about switching their iPhones demonstrate the concept of substitutability wherein they weigh the costs and benefits between their old smartphone and new smartphone.

These factors only hold until the price stays constant. As the price of an iPhone drops, the cost-benefit analysis changes. The marginal benefit or the satisfaction that an individual is getting from upgrading becomes more significant than the current phone. However, this is not how all individuals think and function. The decisions by all consumers are not always rational, based on the cost-benefit analysis. Society, emotions and satisfaction also influence our choices.

Some individuals believe that they really need the product. It becomes a part of their identity, and in the case of Apple, their brand loyalty never fails them. So the people camping outside the Apple store, or who dropped $899 the moment pre-ordering began, aren't exceptionally responsive to prices. They're not making decisions based on substitutability. Instead, they're of a mindset that as long as they can afford the new product, they'll buy it.

Unfortunately, we're starting to discover that consumers can't avoid manipulation, even when they're aware of it. For decades, we've known that advertising is manipulating us, and we still seem to be buying consumer goods we probably don't need.

Each new iteration of the iPhone has unique features: The iPhone 4 in 2011 brought the selfie camera, while the iPhone 5S in 2013 introduced Touch ID fingerprint scanning. The iPhone X announced Face ID. Today, the iPhone 12 boasts a larger screen, faster 5G network connection and more advanced cameras.

But even if your current iPhone functions fine without all the new bells and whistles, "people are attracted to those improvements in quality and capability," says Kelly Goldsmith, professor of marketing at Vanderbilt University. Each new phone and Apple as a brand represent innovation and "tomorrow," which consumers tend to hold in high regard, says marketing consultant Katie Martell. "We really do live in a world where what's new and what's next is considered most valuable."

In the current day and age, having the latest and greatest phone is a status symbol. It's something that you carry with you all the time, so it conveys information about you to other people. Your phone is also a robust mechanism for "self-signalling," a concept in behavioural economics that has to do with how your actions influence your beliefs about yourself. In this case, having the newest iPhone can boost your self-esteem and remind you that you're not outdated. Every time you look at that phone, it tells you something about who you are, reinforcing certain aspects of your own identity.

We're aware of the lines smacked outside the Apple stores when an iPhone is released. People want to be the first ones to have the newest technology. This year, amid the pandemic, people waited for the iPhone 12 outside Apple stores in long queues. To consumers, a line outside of a storefront, signals that whatever is inside is valuable.

Two concepts that are evident in consumer behaviour:

• Social proof- convincing people that other people want the product

• Scarcity- the fear that there may not be enough

Most consumers continue to stick to Apple because of the user-friendliness in their devices.

Everything they make and have made in the past has been for the average person. However, Apple does something rare in that. In the words of Steve Jobs, "They stand at the intersection of the humanities and technology."