It's known as extremeness aversion.

By Mohanbir Sawhney
September 14, 2017

Apple’s launch of the $999 iPhone X, skipping over a version “9” by also unveiling its new iPhone 8 and 8 Plus, isn’t a miscount, but commemorates the 10 years since it launched its first iPhone. By positioning the iPhone X (pronounced as “ten”) as its superlative product with the big price tag, Apple might realize a surprising outcome: greater sales for the iPhone 8 Plus, priced at $799 and up.

One reason that Apple AAPL broke with the numbering scheme with the iPhone X is to showcase it as an inflection point for the iPhone—a shape of things to come for its second decade. With all its fanfare and use of superlatives, Apple wants the iPhone X to stand out as a quantum leap into a new era for the iPhone. By not calling the iPhone X the iPhone 9, Apple is trying to convey the message that the iPhone X is too special to be just the next-generation iPhone—it celebrates all that Apple has done for 10 years, and paves the way for the next 10 years of innovation for the iPhone. Of course, skeptics point out that Samsung’s Galaxy S8 and S8+ beat Apple to the market with the “edge-to-edge” display and OLED technology. Ironically, Samsung supplies Apple with the iPhone X’s gorgeous 458 pixels-per-inch “super retina display.”

But why would Apple launch the iPhone X at $999, a super-premium price point that may put it out of reach for many aspiring iPhone customers? The high price point of the iPhone X may paradoxically bring those customers to the iPhone 8 Plus. The reason is a well-known consumer decision-making bias called “extremeness aversion.” Here’s how it works: When customers are offered three products—high-priced, mid-priced, and low-priced—they tend to gravitate upward from the low-priced to the mid-priced product. They feel that they are “saving money” by not buying the most expensive product and they are getting a good deal with the “compromise product,” which is neither extremely expensive nor too cheap.

It happens in restaurants with wine lists. You don’t order the cheapest or the most expensive bottle, but prefer to choose something in the middle. With cars, the $90,000 Dodge Viper makes the $28,000 Dodge Charger seem like a good deal.

There will be some consumers who will pay a thousand bucks for the bragging rights of owning the top-of-the-line iPhone X. However, the bigger role that the iPhone X may play in the product line is to make the iPhone 8 Plus look like a better deal. Instead of buying a 4.7-inch iPhone 8 ($699 and up), people can “settle” for a 5.5-inch iPhone 8 Plus and “save” about $200 compared to the iPhone X. By going from a two-product choice set to a three-product choice set, the super-premium iPhone X creates a halo effect that benefits its less prestigious cousin—the iPhone 8 Plus. This marketing sleight-of-hand partially obscures the fact that the iPhone 8 and the iPhone 8 Plus both cost $50 more than their predecessors did.

The upshot is that Apple doesn’t need to sell a whole lot of iPhone Xs; it can still make out like a bandit if the introduction of the iPhone X into the choice set changes the ratio of iPhone 8 vs. iPhone 8 Plus sales in favor of the iPhone 8 Plus.

 

Apple is clearly testing the frontiers of consumer loyalty and price premiums. One argument is that the iPhone X and its high price reflect the fact that these devices play a larger role in consumers’ lives, far more than just a means of communication. The smartphone is the center of people’s lives, and more is demanded of them. Clearly, Apple wants to protect its premium positioning and make hefty profits by driving up the average selling price of the iPhone. However, this is a risky game to play, especially in large emerging markets like India and China, where Apple’s market share is low and shrinking. In the past, Apple has made an effort to court emerging market customers by launching lower-priced products like the iPhone 5C, priced around $599, which has done well in India. This time, Apple has chosen to go in the opposite direction by moving up in price, a move that might put it at a serious disadvantage in Asian markets.

In the U.S. market, time will tell how well the iPhone X, touted as the new luxury product, will do in terms of sales. But don’t be surprised if the big winner is the iPhone 8 Plus.

Mohanbir S. Sawhney is a professor at Kellogg School of Management and the author of seven books on management, including the forthcoming book, The Sentient Enterprise.

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