Apple has a reputation for overcharging when it comes to tech. CEO Tim Cook has long maintained that the company isn’t willing to sacrifice quality for price, though some of Apple’s recent pricing decisions have caused consumers to pause.
In addition to an eye-popping $1,300 price tag for its Apple Watch Edition, the company has received some flak for charging $1,000 for its base-model iPhone X. Some analysts have accused the tech titan of price gouging consumers, but company officials appear quite pleased with sales figures for the most expensive smartphone to date.
Both Cook and AT&T CEO John Donovan have applauded consumer response to the launch of the device, noting “demand has been strong.”
While the iPhone X retails for nearly twice the price of the original iPhone, consumers are willing to foot the bill. In many circles, price gouging has an unfairly negative connotation. Economics is based on supply and demand, and there’s no denying that demand for Apple’s latest flagship smartphone is off the charts. Profiting from this success is smart business.
Justifying Seemingly High Prices
The consumer tech market is highly competitive, with numerous global conglomerates running the show. For Apple to maintain its profitability over the decades, it must charge high prices. But even a company of Apple’s scale cannot simply raise prices without a strong focus on marketing. Even McDonald’s has been forced to slash its prices this year to generate revenue.
Most premium smartphones sell for less than $1,000. The Samsung Galaxy S8 starts at $725, an entry-level Google Pixel 2 retails for $650, and consumers can snag a newcomer such as the Essential Phone for only $500. Each of these companies — along with HTC, OnePlus, LG, Huawei, Sony, and many more — provides smartphones for a wide variety of price points.
Charging such a steep price for its premier technology does put Apple at risk for losing market share to one of these hungry competitors. To justify the iPhone X price, Apple must provide plenty of perceived value via its advertising.
The design of the iPhone X is different from previous iterations. The smartphone features a nearly bezel-less screen and a minimalist design that eschews the previous home button. Apple wisely released an incremental update two months earlier in the iPhone 8, which served to accentuate the innovation involved in the X.
Following its conventional release schedule, we’d be looking at the iPhone 7S and 8. But by eschewing that pattern altogether, Apple generated buzz, increased the perceived value of its new phone, and caused industry competitors to wonder whether they’re charging enough for new smartphones.
Apple arguably is shaping the future of smartphones, though it’s revolutionizing the pricing structure of the devices more than the technology inside them. So is it price gouging or smart business?
The Subjective Nature of Price Gouging
The concept of price gouging is based on two things: consumer expectations and a sense of fairness.
Our expectations are largely based on our past experiences. If we’re used to paying $2 for a bottle of water, it’s reasonable to be surprised by a $10 price tag for the same bottle of water at the Super Bowl. Most people anticipate inflated prices at such an event, but there’s a point where sellers create badwill and lose customers.
We also have a subjective sense of fairness. We often conclude that we should be able to find something at a lower price — particularly when we’re in desperate need. In the event of a hurricane or other natural disaster, for example, most people expect water to be cheap because of everyone’s dire need.
That’s a selfish way of viewing the world, however. Demanding cheap water essentially places personal needs above those of the larger community. It also requires, without clearly saying it, that others work tirelessly to overcome obstacles and cover costs with no reward for their trouble. It might seem unfair to raise prices, but companies need a way to ration the limited water that’s available while generating revenue to attract additional resources. The best way to do that is by charging a premium.
In other words, price gouging is in the eyes of the beholder.
That said, it’s not acceptable to exploit people in need. If you came across a man dying of thirst in the desert, I’d hope you would give him a bottle of water instead of asking what he feels his life is worth. There’s a fine line between what’s fair and what’s generally considered right.
Duke University political scientist Michael Munger has explored the fairness of pricing. He distinguishes between voluntary exchange, in which one side can exploit the dire situation of another, and euvoluntary exchange, in which neither party’s situation is exploited. It’s a great rule of thumb and shared moral code for society.
Like all principles that sound great on paper, euvoluntarism becomes problematic when applied to real-world scenarios. It’s highly subjective, and a narrow application can have devastating effects. If no company is able to increase prices to offset the cost of transporting bottled water to a hurricane-stricken area, for example, nobody will do it. That’s not the outcome we want. When you’re dying from dehydration, $10 for a bottle of water seems like a solid alternative.
The ability to charge more money for water can actually push other companies to compete for that business. In other words, a higher price can lead to an increased supply. If the alternatives are no water for a cheap price or a ton of water at a high but decreasing price, the best way to alleviate a shortage is to allow prices to skyrocket.
We can judge price gouging all we want, but a price tag doesn’t necessarily show the expenses involved to deliver a product to market. By not allowing companies to make a profit on their creations, consumers would essentially be punishing them for their service. This is essentially what price-gouging laws do.
Give Apple Your Money (or Don’t)
Ultimately, Apple and millions of consumers seem to agree that the iPhone X is worth $1,000. It’s a voluntary transaction that both parties openly accept. If the cost were too much, people wouldn’t buy the smartphone, and Apple would be forced to drop the price (even if it falls below production costs).
No matter what you charge for a product, people either do or don’t see value in the potential exchange. People who value the product more than others will pay more for it, which explains the premium associated with being an early adopter. Apple will then use that revenue to fund the research and development for its next iPhone, Apple Watch, and whatever else the company dreams up.
People who appreciate the brand and value its products make a purchase, and consumers who feel differently can spend their money elsewhere. Ultimately, Apple isn’t price gouging — it’s proving why it’s an industry leader in the first place.
Per Bylund is Assistant Professor of Entrepreneurship and Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. His areas of research are entrepreneurship, management and economic organization. Connect with him on Twitter.