“I asked some behavioral economists [why the $199 starting price for Apple’s iPhone 3G is causing such excitement], and the answer seems to be that we have no easy way to judge the value of the things we buy, and we especially have no fast and sure way to value the utility we would get from the purchase. So what our brains do is look for easy comparisons to give us answers. In the case of the iPhone, the initial price of the device when it was released last year was $599. Then it dropped to $399. The initial price (and even the first discount) of the phone anchored consumers to the idea that to own this device, you would have to pay a lot of money, substantially more than a typical cellphone,” Michael S. Rosenwald reports for The Washington Post.
“‘It establishes a reference price of $600, and now when it comes down — that’s very, very exciting,’ said Dan Ariely, a Duke University behavioral economist and the author of ‘Predictably Irrational,’ a book about how we make decisions. ‘We compare it to the higher price. I don’t know if Steve Jobs planned this or not, but if he manipulated based on anchoring, he did a very nice trick,'” Rosenwald reports.
“Not only are we getting a perceived deal on the product, but we are also getting a deal on the deal. ‘You get the iPhone, and you get the deal,’ said Richard Thaler, a University of Chicago economist who came up with the notion of transaction utility, which he has described as ‘the difference between the amount paid and the ‘reference price’ for the good, that is, the regular price that the consumer expects to pay for this product,'” Rosenwald reports.
“So then the deal, at its extreme, looks like this: I’ll pay $199 for the iPhone, but I will get a psychological return of $400 from the deal. I’m rich! Of course, it will cost me an extra $10 a month in AT&T service fees, thus wiping out any gains, real or psychological, over the two-year contract period. Thaler said we tend to ‘underweight’ these costs because they are off in the future. ‘There will be people who crunch the numbers, but the people who fall in love with the phone right away won’t,’ he said,” Rosenwald reports.
“These kinds of pricing tricks get played on us all the time,” Rosenwald reports. “In the world of investing, you have to look no further than stock splits… The pricing game can have the opposite effect, too, causing us to want to buy less of something. Perfect example: Gas.”
Much more in the full article here.
It’s no wonder so many people are hopelessly in debt. If only the average IQ could be few points higher, the world would be so much better off. As we wrote yesterday, “Apple has priced the iPhone to appeal to the short-attention-span/instant-gratification mentality that’s so prevalent today. Newsflash for Joe and Jane Six-Pack: ‘No Payments ‘Till 2012!’ still means you have to pay – and more than you would have vs. simply paying full price upfront. It’s disappointing that Apple has to cater to short-term thinkers. That’s why the iPhone is so ‘cheap’ upfront, but really costs about the same as it always has (really a little bit more because it is 3G capable, after all).”
It’s not a matter of IQ. It’s a problem of cognitive distortion. If MDN were smarter, you’d know that.
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MacMarc,
MDN is not blaming IQ per se. If you had a higher IQ, you’d know that.
Also, general stupidity can correctly be attributed to why such pricing schemes work in the first place.
@MacMarc:
Questioning the “smarts” of those behind MDN is a telltale sign of low IQ.
MDN, with their “Takes” and “SteveJack” opinion articles, is consistently one of the best written tech sites on the Web.
If only the average IQ could be few points higher, the world would be so much better off.
Amen!
MDN MW: “Interest” – LOL!
Correct me if I am wrong, but didn’t the old iPhone also include a dock and the new one doesn’t. So there is another $50 to tack on. I might be remembering wrong though.
Makes sense…
Typically when buying an expensive non-essential item (looking for a colour A3 laser printer right now), I tend to check the list price, a consumer report or review, a number of stores and also eBay.
Then come up with what my collar and cap limits are and off I go to haggle with someone or other…
Say the new Apple Store in Sydney the other day. Just great!
Forget the psychobabble crap. It is appealing because it gets into the affordable range. And for those who say it cost the same in the long run, I have one word to say….
Lay-a-way…
I am a long time Apple supporter. I have always been intrigued by the innovation that comes out of Cupertino, and have gladly spent my hard-earned money on Apple products. And I will continue to do so.
Having said all that, there is something so un-Apple about this iPhone deal with AT&T;. I really feel like both Apple and AT&T;are taking folks for a ride.
For instance: why should I ~have to~ pay extra for a 3G contract when there isn’t 3G service in my region? I should have the option to get it or not.
I’ve been looking online for a 1 gen. iPhone so that I don’t have to pay extra for services I’ll never use. The only problem with this is…oh yea, YOU CANT GET THEM ANYMORE through reputable sources such as, oh I don’t know, APPLE.
I know there’s eBay and a few “iPhone stores” out there, but I am sketchy about buying from them.
So…Apple and AT&T;have forced consumers into services that many may not ever use/need, AND the consumer ~has to~ pay even more for them.
I seriously hope that Steve Jobs was held at gun-point to agree with this current contract with AT&T;. If he did it consciously I feel sorry for him.
99% of IQ testing is rubbish. 14% of everyone knows that!
Apple has always been pretty clear– you want, you pay. End of story. It’s just now with AT&T;, they’re willing to compromise their old technique for the cellphone model: you want, you pay, and pay, and pay, and pay, and pay… and pay.
Maybe in the future, when the iPhone becomes as popular as the iPod, they can return with a pay up front model with lower monthly rates. Fat chance, but here’s to hopin’!
Dear MDN,
Sadly, average IQ will forever remain average.
@R:
I couldn’t agree more. But, Apple and AT&T;are big, big businesses, who know a good thing when they see it, and know most of all how to separate you from a lot of your money, and still leave you smiling as they do it.
So don’t hold your breath waiting on price reductions.
$199? HA!!
I needed to put that into my car for gas over the last two weeks. Certainly can’t spare it for APPLE!! Damm Demoncrats blocking any attempt for domestic energy production they don’t like which is most or ways that can’t supply the needs of a growing population like ANWAR, OFFSHORE and NUCLEAR!!
The Saudi’s and Kuwaiti’s are going to help and boost output, but not the other OPEC nations, in fact they are going to reduce output!!! Just look at the “other” OPEC nations ad you can see what’s going on!
http://www.bloomberg.com/apps/news?pid=20601087&sid=akNrdSRvoZ2I&refer=home
BEFORE YOU COMMUNISTS SCREAM, Remember, its inexpensive energy that supplies the world economy and prevents inflation, alternate energy is EXPENSIVE ENERGY.
For instance SOLAR costs 35¢ a killawat hour compared to 3-5¢ for oil!!
Democrats want to sue OPEC NOW! HA!!
@Mad:
I’m one of those Damm Democrats, AND live in Florida, and I’m for at the very least limited drilling. But you do realize, don’t you, that it will be conservatively 7-10 -and I’ve read possibly as much as 15 years- before any supplies come on line from any newly opened areas.
You’ll probably need to gas up before then.
R and lurker each seem to have a better understanding of “IQ” than MDN – an “average IQ” will always be “100”. By definition. That’s what the “100” stands for … average, typical, NORMAL. And then there’s the question of “what IS an IQ?”, the answer to which varies depending on the test used to measure it.
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Few of those tests measure “social smarts”.
Most measure math and other problem-solving smarts.
Few measure neurotic tendencies.
Most measure raw language skills.
Few measure real-world interactions.
Most just measure your ability to get by in a standard “school” environment.
Which in NO way devalues my 2-standard-deviation bonus. Right?
@Bob Sagot,
You are remembering correctly, Sir. Perhaps Apple found that most people didn’t like / use their docks, however, I’m betting that is NOT the case from my anecdotal tests.
MDM is exactly right…people…especially in our I want it now, ADD, U.S. society are Sheeple being led around by their noses.
The new iPhone will cost you $240 more for the contract AND $50 for the dock, so $290 plus you’ll be needing a new shiny case too won’t you.
All this and, as another wise poster put in, you cannot opt out of the 3G network if you don’t have it in your area.
Yes…there is a reason, why I can sell my used 2.5G iPhone on Ebay for 2X what it will cost me “now” for a 3G.
People…are stupid…not us of course….Them
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yes it’s true with the iphone and the contract schemes that come along with it apple has changed sides. before it was: what the customer wants, know it is: what the market demands.
i would be gladly paing 700 euros upfront if i didn’t have to pay the ridiculous service fees t-mobile here in germany wants. because so the iphone is too expensive for me over 2 years vs. my samsung + prepaid. not worth it for me.
so this is now round 2 and again no iphone for me. (and that’s ironic because it seems to become the most important apple product and the only one which i dont’t own.)
oh…for my above post the $290 is w/o the contract uplift…so the actual delta is $490.
Of course there is time value of money, but don’t make me bust out my NPV calculations…
DLMeyer is right. Smart people know IQ is bunkum, or should unless their ego needs a little boost! Doesn’t measure creativity either, the thing that, when coupled with smarts, leads to innovation.
Questioning the IQ of MDN, MDN posters, people who buy iPhone 2.0s for $199 instead of $599 all indicates you have nothing better to do on a Sunday.
That means your social life is less consequential than everyone who went to church this morning instead of surfing the web.
i meant: now it is what the market demands.
Uh oh, here we go.
Surprised there wasn’t an additional model added. Maybe in January. I thought I saw a study where women preferred a smaller phone to hold. Narrower.
@Mad Mac Maniac
Take your GOP talking points and go home. Or better yet, learn to think for yourself.
Had Reagan not dismantled Carter’s energy policies, alternative energies would be as cheap and as common as gas, coal, and nuclear.
More domestic drilling would not solve anything. The oil companies are already sitting on thousands of leases for drilling that they are not using. Plus, the rigs and ships just don’t exist to start more offshore drilling right now anyhow. So any extra oil would be years from hitting the market.
And even then it wouldn’t matter, because the high gas prices are not a supply/demand problem. It is due to futures market manipulation by commodity investors. Like Enron a few years ago screwing us Californians and like the housing bubble, this is a case of investors driving the market out of control. This has nothing to do with any kind of shortage nor higher demand. Any increased supply, would simply go onto this commodity market where the prices are being driven up.
The real problem is deregulation (the Enron loophole – look it up). The solution is regulation. Regulation of markets is not communist… not even close. Regulation ensure a free and fair market that is unmanipulated by big money. Gee, that sounds remarkably like capitalism to me! So stop hurling epithets and trying to demonize people and learn a little economics and history.
Watch this:
and read this: http://www.cbsnews.com/stories/2008/06/17/broadcasts/main4188620.shtml
But you do realize, don’t you, that it will be conservatively 7-10 -and I’ve read possibly as much as 15 years- before any supplies come on line from any newly opened areas.
It’s more like 5-7 years, but along with building new fail safe nuclear power plants, a few exotic alternative energy sources. Exploring Oil shale, coal conversion and tapping natural gas, there is LIGHT at the end of the tunnel. Instead of the DEMOCRATS “WE WILL SIT ON OUR HANDS AND HOPE A WHITE KNIGHT CHEAP SOURCE OF ENERGY APPEARS THEN WE WON”T APPROVE IT BECAUSE WE WANT THE GREAT COUNTRY OF USA TO FALL TO COMMUNIST CHINA!!”
GO ahead and sue OPEC, tax the oil companies profits who refine our oil and provide Americans DECENT JOBS and all the other idiotic EMOTIONAL answers that don’t solve the problem.
I’m a certified Mensan, the more I get involved in politics, the more I’m convinced the Democrats by and far are just plain raving idiots!
Right now China with a Cuba license are drilling a mere 60 miles from the coast of my house in Florida.
China is the worlds second largest consumer of oil next to the USA.
How long are you STUPID Democrats going to wait?
DRILL NOW!! Not within 10 miles of course, just the outer cont. shelf.
$10 a gal gas (if clueless Obama gets elected) and no alternative electric cars because there is not enough nuclear power plants.
Save the USA, lock up a Democrat on election day!
It is not all Democrats, it is the liberials that give many Democrats a bad name. Reagan Democrats do have brains. By the way I am a Republican and know many democrats with brains, liberials are the one’s with a loose screw.