The Weird Economics of Apple Upsell
Apple provides a good example of a strange economic phenomenon
A lot of economic theories, predictions, and policies are based on the assumption that people are essentially rational. But is that a reasonable assumption? Naturally, that will depend on exactly what we mean when we say people are rational.
Sometimes, assuming rationality means assuming that people make decisions in their own best interests. They optimize. They choose and pursue options that maximize their welfare.
At first thought, this seems like an odd assumption, because people often make decisions that certainly appear to be irrational and against their own best interests.
Some people smoke, for example. And you or I might consider that to be a bad decision.
The smoker themselves, however, might consider the enjoyment they gain from smoking to be more important than the increased risk of cancer and early death.
And, given that perspective, it can be argued that they are still behaving rationally and maximizing their own welfare by continuing to smoke.
As you can imagine, some economists think it’s unrealistic to assume people maximize their own welfare, even from the perspective of their own peculiar value systems. They might even say such an assumption is just wishful thinking based on a bone-headed determination to ignore reality.
In real life, people have irrational fears and prejudices that affect their decision-making processes. They make all sorts of decisions that work against their own best interests. And many people will admit as much. They know, for example, that they drink, eat, or smoke more than is good for them, but they do it anyway.
But even when the more realistic economists construct economic models and make predictions about people’s behavior, they usually still assume that people are “rational”— just in a rather narrower sense of the word.
Mainly what economists mean when we say people are rational
is that people aren’t just making decisions at random. There’s a pattern to their decisions because they follow some decision-making rules. And this is what gives their decisions some degree of predictability.
A simple example might explain it better:
A person has three options: A, B, and C. If they prefer A to B and prefer B to C, you might think it was fairly obvious that they would prefer A to C.
And that’s what the assumption of rationality is mainly about. The person has an order of preference. When they choose one option over another, this gives us an insight into the broader pattern of their preferences. And we can then use this information to make predictions about their future decisions.
This is important because if we couldn’t usually do that, the ability of economists and business analysts to make reasonable predictions would be severely undermined. We could be wasting our time making models and predictions when there isn’t actually a clear pattern on which those models and predictions can be based.
Thankfully for economists and other analysts, people usually are rational in this narrower sense of the word. And this means that useful models can be constructed and helpful predictions can be made.
But the assumption of rationality is an assumption. It isn’t necessarily true all the time. And an interesting example would be the way Apple’s upselling strategy works.
“What the hell am I doing about to spend $1,249 on a damn phone?”
Apple is known for being quite cunning when it comes to upselling. They’re not pushy. They’re not like aggressive car salespeople who try to pressure you to fork out for all sorts of upgrades and optional extras. People who frequent Apple stores tell me that the staff there aren’t pushy in the slightest.
Instead, Apple simply set up their product ranges and their price structures to encourage the upselling to take place in the customers’ heads, all by itself.
Look at the current iPhone situation, for example.
At the time of writing (November 2019), Apple still sells the iPhone 8.
It comes with 64GB of storage and is available for “just” $449. And for most people, it probably does all they would need a smartphone to do and plenty more. They really don’t need anything more expensive than that.
You wouldn’t want to find you’d run out of storage when you could have bought the 128GB version for just $50 more — at $499. So that’s probably the version you should go with.
I see the XR is available for just $599. Now that’s a much more modern-looking phone. At barely a year old, it’s much newer than the three-year-old iPhone 8. So it would seem very reasonable to get that instead.
That’s only got 64GB of storage, so obviously it makes sense to buy the 128GB version instead, for just $50 more — at $649.
Hang on! It’s only an extra $50 from there to get the iPhone 11. That’s Apple’s brand new mainstream model — available for just $699. Yep. You should definitely get that instead.
Obviously you’ll be going for the 128GB version as that’s only $50 more, at $749.
And so it goes on. A little bit more for extra storage. A little bit more for a nicer model. A little bit more for a bigger screen… until perhaps you end up with a 256GB iPhone 11 Pro Max at $1,249.
So, you may have started out thinking of buying a phone at $449. And now you’re seriously considering buying an iPhone 11 Pro Max at $1,249 — at not far off three times the price.
You might manage to stop at this point and ask yourself, “What the hell am I doing about to spend $1,249 on a damn phone?”
Or you might just go ahead and buy it. After all, you followed a rational and reasonable process, didn’t you? You could go back and look at each individual step of the decision-making process — and every one of them might seem perfectly reasonable.
And yet if asked to directly compare the iPhone 8 at $449 with the iPhone Pro Max at $1,249, you might quickly identify the iPhone 8 as being far and away the better deal of the two.
Or perhaps it’s reasonable to go for a newer model, but if asked to directly compare the iPhone 11 at $699 to the Pro Max at $1,249, you would consider the 11 to be easily the better deal.
Thus, in some ways, the success of the upsell process is based on irrationality.
Simplifying slightly, the fundamental situation is this:
Products A, B, C, and D are progressively more expensive. B is preferred to A. C is preferred to B. D is preferred to C. But in a straight choice between A and D, A might be declared the easy winner.
It’s a circle of irrational preferences:
So what’s going on? Are consumers just being irrational? Or is there some rationality behind their apparent madness?
Well, perhaps there is.
If A and D were the only models in the range, A might come out as the winner. But the existence of B and C changes the dynamic of the situation.
Firstly, the intermediate products discourage people from comparing A and D directly. People instinctively compare each product with the next one up or down in the range — and perhaps lose sight of the bigger picture.
But secondly, and perhaps more importantly, the existence of B and C makes people feel bad about choosing A.
B makes people feel bad about buying A because B is better and only slightly more expensive. C makes people feel bad about choosing B for the same reason. And D makes people feel bad about choosing C.
A may be a better option than D, but people may choose D because there is no option E to make them feel bad about choosing D.
Enjoyment is a subjective experience. And the existence of intermediate products can lessen the enjoyment people experience from a cheaper product because they continue to suffer from that nagging doubt that perhaps they should have upgraded their choice, since an upgrade would only have cost a little more.
That makes them slightly unhappy about going for the cheaper option. So to avoid that nagging doubt, they upgrade to the next model.
But once you’ve given in to that doubt, you’re trapped because now you’re in the same fundamental situation all over again.
And the only way to get rid of that nagging doubt is to upgrade to the model at the very top of your range. Further upgrades from there would either be unaffordable or pointless because you simply wouldn’t use the extra features or storage capacity on offer.
You end up with a phone that’s far more capable than you really need it to be — and costs far more money than you really ought to be spending.
But oddly, in a sense, your choice is rational. You are happier than you would have been with a much cheaper model — but only because of the existence of the intermediate models, which plant that nagging doubt in your mind. And you may have to pay a lot of money to get rid of that doubt.
It wouldn’t even matter to Apple if nobody ever bought these intermediate products. Their main purpose might be to serve merely as mental stepping stones to help you reach your decision to buy a more expensive model. If only you could pretend they don’t exist, you could buy the cheaper model, save a whole heap of money, and be satisfied you’d got a great deal. But can you pretend they don’t exist? Probably not.
The long and short of it is this: People are weird. But there is often some sort of rationality involved even in some of their most irrational-looking (and expensive) decisions.
Meanwhile, the money keeps rolling in for Apple. They probably don’t especially care whether people are being rational or not.