The iPhone “Loss Leader”

Reminder: Apple sells devices to make money.

Yesterday, I wrote a post about the massive marketing push by Apple seemingly to propel the iPhone 5c to success. But I was struck by how many people responded to me with the same, different theory.

Rather than Apple trying to bolster the iPhone 5c sales with this advertising assault, a lot of folks think this is Apple using a more marketable product, the iPhone 5c (thanks to its colors), to get people in stores to ultimately drive sales of the more expensive, and thus, more profitable iPhone 5s.

In other words, these people view the iPhone 5c as a sort of loss leader for the iPhone 5s. While a compelling theory on the face of it, I have to disagree. And the reason is simple: Apple doesn’t do loss leaders. Or, at least, they don’t do them well. It’s not in their DNA.

First of all, a loss leader implies that a product is being sold at a loss to lead to the sale of something else at a profit. But Apple doesn’t sell products at a loss. Even the Apple TV is not being sold at a loss (despite some speculation to the contrary). Granted, that product line is probably the closest thing Apple has to a loss leader, since Apple has long been just “exploring” that market. And they may actually be making more money on content instead of hardware, which is weird for Apple. But it’s still not a loss leader.

The iPhone 5c, while less expensive than the iPhone 5s, is in no way a loss leader. Apple is making money on each unit sold. A lot of money. The margins may not be as high as they are with the iPhone 5s. But it’s probably pretty close because the iPhone 5c features a few cheaper components (chip, camera, memory, etc).

And, of course, the concept of a “loss leader” implies that something is being sold at a loss in the first place — but anyone being lured into an Apple Store to buy an iPhone 5c and then walking out with an iPhone 5s almost certainly is not buying that 5c. In other words, they’re not buying the loss leader. So in other words, it’s not a loss leader at all. If you believe this theory, the iPhone 5c is actually more like a “leader” or maybe even a “decoy”.

But again, neither of those are in Apple’s DNA to produce. They did not make the iPhone 5c for marketing purposes. They created it to make money. I think there was a miscalculation there — and I’m hardly the only one who thinks that. And that’s why I think we’re now seeing the ad push to try to clear out inventory before the next iPhone emerges.

And if this push doesn’t work — which I don’t think it will — I wouldn’t be shocked to see another strategy along the lines of the iPhone 5c being kept around at the low end of the line while the iPhone 6 moves into the high end and the iPhone 5s is retired.

I do think there’s something to the notion of the iPhone 5c having a stigma around it because it’s so (colorfully) blatant that you went with the “cheaper” iPhone (whereas the “cheaper” iPhones in the past could have simply been an “older” iPhone). And for a mere $100, you could avoid that stigma.

There is talk out there that Apple is thinking about raising the price for the iPhone 6 by $100. While still purely a rumor of course, a year and a $200 price difference may alleviate the stigma concern for the iPhone 5c. Or imagine if the 5c is sold at a very attractive price completely unlocked…

Regardless, the iPhone 5c was obviously not conceived as some sort of loss leader for the iPhone 5s. And so I refuse to believe the marketing push around it is now trying to back it into that corner. It was a product created to offer a new, more compelling option to the buyer of “last year’s iPhone”. And it’s one that was perhaps the result of a new design direction at the company. But first and foremost, it was a product created to do the two things Apple does best: delight and make money.