Closely related, but at the other end of the scale is ‘the point of diminishing returns.’ That’s when the going gets difficult, and adding new customers costs more per customer than, say, the first 80-percent. It looks as if Apple has gathered all the low hanging fruit already, and the point of diminishing returns is here. Let’s call them Android switchers.
Low End, Not Cheap
Back in the day, far back to the waning years of the last century, Apple did the unthinkable and it almost bankrupted the company. It followed Microsoft’s example and licensed MacOS. That venture made no sense at all and Steve Jobs killed it quickly when he returned to Apple.
After all, why buy an expensive Mac from Apple when you could buy an inexpensive PC that ran Mac OS? The math just didn’t work for Apple. Likewise, I see some math problems with Apple’s attempts to broaden the market for iPhones and iPads beyond the billion or so customers the company already has.
Windows users have been switching to the Mac from generic and brand name PCs for many years. The trend has never been in the other direction because there is a growing segment of PC users who recognize the value and quality in a Mac. Those new customers bite the bullet and pay the piper, to mix a couple of Friday Freebie Metaphors, and are welcomed into the light from the dark side. In other words, they pay the price of freedom from the tyranny of mediocrity.
A similar phenomenon takes place with Android users who switched from their plastic coated feature phones into iPhone knockoffs known as Android, manufactured to varying degrees of quality, and thousands of models, by hundreds of manufacturers. That morass of plastic, and the ill fitting apps that cell phone makers shove into their devices, and the resulting security issues of un-upgraded smartphones has caused something of steady stream of users exiting the dark side for the light of iPhone.
Here’s the problem. Android customers are notoriously cheap. They’ve dined on cheap plastic throwaway phones for years. They prefer free apps to paid apps (notice that with all that marketshare, Android app revenue pales in significance to iPhone app revenue). And while they will certainly enjoy their journey into the Apple ecosystem, they have to be enticed to make the switch by… insert drum roll here… lower prices.
Don’t misunderstand the math. Apple makes a lot of money on every iPhone sold, whether a top of the line iPhone 6s Plus with 128GB of storage, or a diminutive iPhone SE with a mere 16GB of storage that’s priced less than half the top of the line model. Hidden in Apple’s recent financials– because everyone was paying attention to other horrible numbers– was the iPhone’s average selling price, a key indicator of gross profit margins. It dropped $50– down from a record $690 to $640. That’s per iPhone. For a company that sold about 40-million iPhones, that’s $2-billion in profit that disappeared.
Why? The low hanging fruit has been picked. Apple has enter the dark forrest of diminishing returns where prices and margins drop and the number of new customers cost more to obtain. Mix in a little cannibalization where current customers who may have purchased a more expensive iPhone now go for the cheap cheap. Ipso facto, and Voila! Apple makes less money on more effort.
Don’t misunderstand the math. Apple wants those customers, and they’d certainly prefer they be of the low hanging fruit quality where the margins are rich and green and easier to count, but they’ll take what they can get, and what they get these days are notoriously cheap Android switchers who likely are aghast at an App Store that has apps with price tags.