Thoughts on the Apple iPhone’s Price Drop

According to a theory called Diffusion of Innovations (DoI) formulated by Everett Rogers, early adopters (those eager to explore new options in technology) make up 13.5 percent of the population. Other models and theories on technical diffusion have proposed concepts of early adopters using new technology and helping move it to the point where it needs to “cross the chasm” and become mainstream. These ideas also suggest that early adopters tend to negotiate at the high point of the cost curve.

 

When the Apple iPhone was introduced two months ago, most early adopters were willing to pay up to $599 for the product. While Apple’s recent announcement of the price drop to $399 was quite surprising to most, others including myself understood this pricing strategy as a reasonably necessary method used by companies to increase revenue. Still others have argued that the short time frame in which the price decrease occurred was unprecedented and unfriendly to customers. Surely these points deserve some consideration.

 

The corporate strategist in me however, tends to favor the cost vs benefit opportunities presented by the scenario. My first consideration is the technology adoption life-cycle, a sociological model originally developed by Joe M. Bohlen and George M. Beal in 1957. The concept was later broadened by Everett Rogers to develop DoI; the study of how, why, and at what rate new ideas and technology spread through cultures.

 

As shown in the figure below, according to Rogers’ theoretical framework and the research evidence supporting the Diffusion of Innovation model; the first group of people to use a new product are called “innovators,” followed by “early adopters.” Next come the early and late majority, and the last group to eventually adopt a product are called “laggards.”

 

 

 

The strategic perspective suggests that Apple Inc. may believe that the early adopters market for the iPhone has been sufficiently exhausted. Therefore, the next Logical step is to advance toward the sweet spot of the curve. Notice that early majority and late majority make up about 68% of the potential market. At this level, a price reduction is necessary to capture the mainstream in order to maximize profits and increase revenue. Indeed, it’s a numbers game. Of course, I’m sure additional quantitative and qualitative analysis as well as gut-level logic played a role in their decision model but in the end, this is about value creation for the long term.

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