iPhone 12 Strategy Review

“At a virtual event on Tuesday, Apple executives announced a bajillion new iPhone 12 Models,” was the first line of Joanna Stern’s article in the Wall Street Journal on 14 October 2020.  For Apple, statements like this highlight challenging tradeoffs.

Before we discuss the strategic tradeoffs, let’s clarify the situation.

Apple launched its iPhone 12 lineup and updated some older iPhone models to deliver seven new handsets, each with its own versioning on storage size and other features, yielding an even wider set to choose from.

The new iPhone line up included the:

• iPhone 12 Mini for $699 and up,
• iPhone 12 for $799 and up,
• iPhone 12 Pro for $999 and up,
• iPhone 12 Pro Max for $1099 and up,
• iPhone 11 for $599 and up,
• iPhone XR for $499 and up, and
• iPhone SE for $399 and up.

Seven plus sub-versioning is a somewhat long product line for Apple, but would be a short one for companies like Samsung, Huawei, or Olo in handsets or Dell in computers.  What should guide executives in selecting the length of their product line?

Product Category Maturity

One observes greater offering proliferation as a product category reaches maturity.  This is the natural result of market expansion, where companies seek to produce ever lower-priced offerings to bring more customers into the market, and greater competition, where competitors seek to differentiate themselves, even marginally, from one another. As product categories mature, price points and benefit variations tend to expand to attract more customers both into the market and away from competitors.

Applying product category maturity issues to Apple’s iPhone 12 launch, we can conclude that Apple is clearly suspecting revenue and a profit with their increased product line-up.  They are simultaneously expanding their offerings to reach more customers at lower price points on the bottom end of the spectrum while improving their top-of-the-line-up product to deliver even greater and broader benefits at a higher price. This may enable Apple to more strongly compete in developing markets while maintaining a premier status in developed markets.

Magic Number Seven, Plus or Minus Two

In 1956, George A. Miller produced research on short-term memory. This research measured the average capacity of short-term memory in humans to be seven chunks of information, with a range of plus or minus two. This became known as the “Magic Number Seven, Plus or Minus Two.”

Beyond seven offerings at a time, it becomes cognitively difficult for people to make tradeoffs. When customers have a challenge in product selection, they may delay decision making leading to the ultimate bad outcome – non-purchase.  Thus, for product management, this cognitive theory implies that product lines should be limited to seven offerings.

Online marketers too have noticed challenges in how many offerings to present at a time.  For many companies, A/B tests have shown greater sell-through when two and only two offerings are presented at a time.

Applying short-term memory limits to Apple’s iPhone 12 launch and reading Stern’s review, we can suspect that Apple is hitting this limit, if not overreaching it.

Good Better Best Super-Best

Behavioral economic studies on versioning have long demonstrated the power of a Good-Better-Best line up.  This and other studies on versioning can be found in Information Rules (1999) by Carl Shapiro and Hal Varian.

The “Good” offering should be good enough to enable product category entry.  It does not have to deliver all the features and benefits possible in the product category.  It does need to deliver the basic functionality required of the product category. And, it should be priced low. It serves as a market-expansion offering.

The “Best” offering should deliver all the benefits one could desire within the product category.  It is aimed at the customers who want the best and have the ability and willingness to pay. This should be priced high. It serves as a high-margin profit-generating offering.

Between these two would lie the “Better” offering. Think of this as the solution to the Goldilocks problem. It offers more benefits that the “Good” offering but doesn’t overload the offering with benefits like the “Best” offering.  It should be priced in between the “Good’ and the “Best”.  For marketers, it is likely to serve as the best-selling and most revenue generating offering.

Behavioral economics has shown that, given a “Good-Better-Best” lineup, customers are most likely to select the “Better” offering.  When asked why a customer chose the “Better” offering, they found that some customers were afraid of giving up too many benefits with the “Good” offering so chose the “Better,” while other customers were afraid of overpaying for the “Best” offering so, again, chose the “Better.”

More recent experience has demonstrated the value of adding a “Super-Best” offering.  This offering may be deliberately developed to deliver more features and benefits that any customer could possibly demand but also serve as an anchor at the high-end to draw customers up the offering lineup.  Many times, companies find that fewer than 2% of the market is attracted to the “Super-Best” offering, but once it is launched, more customers buy the “Best” offering as the “Super-Best” anchors an even higher price point, thus making the “Best” look like a good deal.  The result: profits improve.

Applying this behavioral economic research on versioning to Apple’s iPhone 12 launch, we can see that Apple is following the rule with their iPhone 12 Mini, iPhone 12, iPhone 12 Pro, and iPhone 12 Pro Max lineup. The 11, XR, and SE do not fit here.

Tradeoffs

Was Apple correct to launch seven offerings this year?  It is clear that there is rationale behind their strategic decision. We see the “Good Better Best Super-Best” strategy applied to the iPhone 12 itself.  We see the “Magic Number Seven, Plus or Minus Two” applied to the overall new product lineup. And, we have clear indications of a strategic choice towards expanding the product line to span the market niches within a maturing product category.

So what went wrong for Joanna Stern?  From a price theory, Apple’s strategy should deliver positive results. So, let’s look elsewhere. While I am not a marketing communications expert, but rather a pricing and corporate strategy expert, I suspect the challenge arose from presentation and wording. Perhaps the iPhone brand needs a simpler sub-branding strategy?

In the meantime, I like my iPhone SE.