Customer Acquisition and the Entry Level iPhone

on August 13, 2013
Reading Time: 4 minutes

From an industry and market standpoint, a lower-cost iPhone certainly has the potential to shake up the market. In what ways we can only speculate but there are a few points about an entry level iPhone that are worth discussing.

The Cost to Acquire a Customer

This is basically how I view any product Apple prices below a premium price point. Any move Apple makes to go downstream is a strategic move to acquire customers who seek value but not at premium price points and get them into Apple’s ecosystem.

If Apple was just a hardware company and that is all, then it would make sense to have a discussion about how fast they can go downstream in order to compete globally. But Apple is not JUST a hardware company. They are a hardware + software + services company and each part plays a critical part to the whole experience.

To analyze Apple correctly we need to understand how the hardware plays into the software which plays into the services. Therefore we look at an entry level iPhone as a way to acquire new customers Apple finds valuable. I make this point specifically because I don’t believe a customer who just wants a “cheap” product is the kind of customer Apple wants or one that adds any value to a computing ecosystem. I say this because these customers don’t spend much if anything in app stores. These customers just want the cheapest data plans possible. These customers are unlikely to spend money on additional services, etc. [pullquote]The fallacy those who think price is all that matters fall into is believing that all consumers value the same thing.[/pullquote]

This is why Apple will never compete with anyone in a race to the bottom. Those customers are simply not valuable in the grand scheme of things and arguably not worth competing for. And luckily those who just want cheap are only a percentage of the overall consumer segment. The fallacy those who think price is all that matters fall into is believing that all consumers value the same thing. It is incorrect to believe that its hard to compete with free. It is easy, all you do is create a better product, experience, or solution, and market it to those who will value it.

So the philosophy of an entry level iPhone pricing is as such: the lowest price Apple believes is necessary to capture the type of entry level consumer who is still valuable to their ecosystem.

Horace Deidu, posted on his site Asymco in May, that iTunes customers spend at a rate of $40 per year as an average. Certainly in some cases, like mine, people spend more than $40 per year, and certainly in some cases people spend less. A person who just wants cheap would not spend nearly as much if anything in Apple’s ecosystem. But the key point for Apple and an entry level priced iPhone is how low does it need to be to still acquire a customer who will spend money and add value to the ecosystem. Apple could take a margin hit in order to acquire said customer and still make up that margin hit on the hardware and then some over the lifetime value of that customer. This is why the services (iTunes, iCloud, and future services) are so important to Apple’s long term strategy.

Redefining Engagement

Some additional necessary thinking was shared by Benedict Evans today with is post Defending iOS with Cheaper iPhone. Lots of good thoughts in this post as usual from Ben but one in particular is worth fleshing out.

“If total Android engagement moves decisively above iOS, the fact that iOS will remain big will be beside the point – it will move from first to first-equal and then perhaps second place on the roadmap. And given the sales trajectories, that could start to happen in 2014. If you have 5-6x the users and a quarter of the engagement, you’re still a more attractive market.”

This is a very interesting point and worthy of thinking and discussion. Engagement is an important metric but we must first back up and ask whether all engagement is equal? For example are even the most “engaged” people on iOS and Android doing the same things? In some cases, like in working professionals or premium customers, the answer may be yes but I’m sure there are also many cases where the answer is no. The other challenge with using the engagement statistics most promote publicly is that they all exclude important metrics. For example we don’t know how much extra time iPhone (or iOS) consumers spend on the device browsing the App store or shopping for music. The same is true on Android. This would be some key stats that would shed more light on engagement and said users value to an ecosystem. ((of course, engagement on tablets is so disproportionate on iOS vs. Android. And on this point, it may never be equal.))

If we just measure engagement by things like talking on the phone, texting, browsing the web, doing email, playing games, etc., then on the surface we can make an observation that at some point this these will be equal by sheer volume of Android. Simply because these are common tasks. What needs to be added additionally for a holistic ecosystem analysis is how much time is spent additionally where things (and all regions) may not be equal.

Regardless, even if the level of engagement does become equal taking Android 5-6x (or more) the customers to reach the same engagement, both platforms will remain and will be a focus for developers.

Lastly…

This is a point I have not seen made yet that I think is very interesting. As much as Apple will benefit from getting new customers with an entry level iPhone that benefits their ecosystem so will Google. We know Google makes more on iOS than Android and interestingly an entry level iPhone will likely help Google’s bottom line as well. When you dig through the numbers on how profitable iOS is to Google’s search revenue, Google may be the biggest cheer leader for a lower-cost iPhone.

The questions around this are interesting. If a lower-cost iPhone does shake up the market in Apple’s favor globally would Google put even more emphasis on iOS? Would Apple even let them? Will Apple do more strategically with Siri to usurp search or other value from Google?

Services are a critical part of the end game for many industry players. Google was always fascinating to me because they are a services company first who worked their way backwards into software, and now hardware with Motorola. Apple came from it the other direction starting with hardware and software and now investing heavily in services.

Strategically, so much is going on in the market that will define the next decade or more of computing.