iPhone Price Cut Gamble Has Customers Abuzz

When Apple (Nasdaq: AAPL) CEO Steve Jobs abruptly announced that the company was cutting the price for the 8GB iPhone from US$599 to $399, he appeared to be a bit dismissive of the product's early adopters -- many of whom stood in line for hours to acquire the coveted gadget. Some 24 hours later, though, he was trying to make amends.

"Even though we are making the right decision to lower the price of iPhone, and even though the technology road is bumpy, we need to do a better job taking care of our early iPhone customers as we aggressively go after new ones with a lower price," he wrote in an open letter to Apple fans. "Our early customers trusted us, and we must live up to that trust with our actions in moments like these."

Among the conciliatory actions Apple is taking is offering early buyers a $100 store credit toward the purchase of any product at an Apple Retail Store or the Apple Online Store.

Worries Manifest in Stock Price

Apple's customers weren't the only ones shocked by the surprise price cut coming some some 10 weeks after the device was first introduced. Speculation industry analysts has ranged from poorer than acknowledged sales to, as Jobs said, the desire to position the iPhone for the upcoming the holiday shopping season at the best price point possible.

Investors weighed in as well. The day the announcement was made, Apple's shares fell 5 percent. The following day, the stock fell another 1.3 percent to $135.01.

Some of the decline was to be expected. Fred Ruffy, analyst with the investor education firm Optionetics, noted that shares had risen 20 percent over the last three weeks in anticipation of Apple's announcement.

The iPhone price cuts were not expected, however, he told CRM Buyer. "Certainly, the size of the price cuts came as a surprise to most analysts and investors. The move seems to have raised some concerns about the real demand for the new phone. After all, why would Apple cut prices if the product was already flying off the shelves?"

Don't Burn the Customers

Investors and industry analysts, though, can be soothed much more easily than a disgruntled customer base. Chief among the uncertainty surrounding Apple's near-term direction is the question of whether it has done serious damage to its brand.

Apple, apparently, thinks not. Others in the industry wonder.

"Unfortunately, Apple's business model requirements are not necessarily aligned with brand stewardship requirements," Susan Fournier, a professor at the Boston University School of Management, told CRM Buyer.

"It's branding 101: Drop the price, dilute brand equity. Ask Calvin Klein, who took Warnaco to court over such a move when they sold CK jeans for $20 in warehouse club stores. But it's worse than that with iPhone. Drop the price for second-stage lingerers waiting in the wings for a good deal and you anger your most loyal evangelists for the brand," Fournier said.

Will Customers Bolt?

Indeed, there is a sizable percentage of Apple customers that are feeling duped.

Wunmi Bamiduro, a tech consultant based in Washington, D.C., and owner of multiple Apple PCs and other devices, bought an iPhone the day it was introduced. He will think twice before participating in a first product rollout again, he told CRM Buyer.

"If I had known Apple would drop the price so quickly I might not have gotten it," he said. "I have a lot of tech toys, and I expect the price to drop after six months or so. I don't mind being an early adopter and dealing with the bugs that go with it. But still, being an early adopter should also mean I should be able to enjoy my product for a little while before the price is slashed."

Jonathan Ulman, a music business professional in New York City, is also peeved with Apple. "I was very upset about it -- this is a 33 percent price drop, which is steep compared to other price drops of new products like high-def television or the Xbox," he told CRM Buyer.

Ulman, who describes himself as a "moderate to high" Apple fan that is slowly "Apple-fying his house" also will hesitate the next time Apple unveils a must-have gadget. "Why not wait if the price will drop so quickly," he wondered.

The Right Move

Apple, though, has not completely lost its touch with its customers. For every Ulman or Bamiduro, there is also a Melody Callaway. An account executive in Denver, Callaway acquired the phone on the second day it was on the market.

There was no line, plus, zero connection/network problems when I was setting it up," she told CRM Buyer.

Callaway was not surprised -- or angry -- when she heard the news about the $200 price cut. "Even though Apple boasted that the price point wouldn't change, as with all cell phones, the price drops. Remember, when the Palms and BlackBerries first came out, price gouging was at its best."

Plus, she added, the $100 rebate is a great move to appease loyal Apple customers. "In the end, the Apple cult will forgive its loyal leader, Steve Jobs, and continue to praise its products," she predicted.

Calculated Risk

Callaway is part of a group over which Apple appears to have made a calculated gamble -- and in her case, at least, the company won its bet. Callaway is a newcomer to the Apple mystique, having bought both her first Mac and the iPhone in the same month -- in other words, she is not a complete loyalist.

Apple is betting that the customers it can gain by dropping the price outweigh those that it has permanently angered, speculated Jim Kane, a senior partner with The Brookeside Group, a consulting firm specializing in customer loyalty. "By the end of September, Steve Jobs says they will have shipped 1 million iPhones. Of that number, let's say three-quarters are hardcore Apple buyers that will forgive it this one mistake."

The remaining buyers are people like Callaway -- newly introduced to Apple as part of its move to expand beyond its 5 percent market share. "Apple is hoping this group will stay -- that is the point of the $100 rebate," Kane said. "But if they don't, they can make up the lost ground during the holiday season. It was a smart move doing this so quickly."

Whither the Brand

Andy Abramson, CEO of Comunicano, a marketing communications agency, also believes Apple handled the situation correctly.

"We all know that electronics drop in price based on sales velocity and momentum," he told CRM Buyer. "In the case of Apple, lowering the price to drive consumer adoption makes sense. What's more, it paves the way for a more expensive and faster, higher-capacity model to come out next while keeping that at the sub-$600 price point once again."

Abramson happened to buy the iPhone this past Sunday, paying full price. He went back to the store and received the credit.

"Apple loyalists may feel they bought early, but they have been that way from the very start, and yet they still buy Apple. I don't see long-term harm, but only long-term gain," he said.

However, even if that is the case, argued Kevin Stirtz, author of "Marketing for Smart People", Apple's brand deserves better.

"People expect more from Apple," he told CRM Buyer. "So just because Nokia (NYSE: NOK) and Moto phones drop fast in price doesn't mean Apple should do the same thing in the same way. Their fans expect better treatment from Apple than from a typical mobile phone company."