Has the Apple iPhone 5c really failed?


There is some commentary on the Techpinions site where Brian Hall waxes lyrical about the relative failure of the iPhone 5C (http://techpinions.com/trying-to-understand-how-iphone-5C-failed). Apple admitted that they got the projected mix a bit wrong; the most expensive, aspirational 5S model exceeded their most optimistic sales projections, where the 5C sold much less. I think there were two fundamental reasons:

  1. Apple targeted the 5C at a younger audience than the 5S, with bright colours and functionality equivalent to the previous iPhone 5 model. The handset price really only made it affordable for the 50% of people who obtain their handset as part of a 2 year contract.
  2. The full retail price of the 5C handset was £100 short of the £600+ of the aspirational 5S product above it. At first blush, that appeared to be very high, though it may be difficult to understand the complexity Apple faced in other markets and trying not to upset the existing customers of iPhone 5 handsets.

My theory is two fold. The UK is around 50% contract, spreading the cost of the handset over a two year term, and 50% pay as you go, where the consumer has to pay full retail for the handset up front.

Theory One is that by launching in October, they missed one of the “purchase binge” periods where new Secondary School kids were bought their first handsets by their parents. You are then subject to a slow burn, selling volumes gradually as existing 2 year contracts of older kids come up for renewal month by month.

The Second is more complex, and relates more to the folks buying the handset outside of a contract; the preserve of the wealthy, or of those on SIM-only or Pay as you Go tariffs. As an illustration from the excellent book from Dan Ariely entitled “Predictably Irrational“, he cited a rather strange special subscription offer from The Economist to their readers. They offered:

* a subscription to Economist.com for $59
* a subscription to Economist Magazine for $125
* a subscription to the online and print edition for $125

At first blush, a silly offer. In tests, 16% chose the Internet only edition, 0% the print only one, and 84% the very expensive print plus Internet offer. However, if you alter the offer to reflect only:

* a subscription to Economist.com for $59
* a subscription to the online and print edition for $125

then the takeup goes to 68% and 32% respectively. So the presence of a similar, but clearly inferior, decoy in the 3-way offer swings the takeup of the high priced option from 32% to 84%.

Remembering that the very inferior, older iPhone 4S is still sold at a massively lower price, doesn’t that sound exactly the effect of Apple pricing the 5C too close to the 5S in their 4S/5C/5S lineup?

So, for the UK market, Apple were late with the 5C and fundamentally have priced it too close to the 5S, making it a decoy price; it really needed to be in the £300-400 band to make a fundamental difference here. That said, dynamics in other markets, and not wanting to undermine the second hand price for owners of previous iPhone 5 users, may also have been factors tying Apples hands.

I’m sure the next generation they release, likely encased in a Liquid Metal enclosure (cheaper to fabricate than milled aluminium) and with a Sapphire screen, may allow Apple to come down far enough in price to correct this and hit their next spurt of growth without lowering their margins. If indeed is that is something they want to do.