Eventually, according to conventional wisdom, Apple (AAPL) will go too far. The theory is that at some point, their strategy of making incremental changes to the suite of iPhones available while hiking prices with every change will meet with consumer resistance. That sounds great in theory, but it doesn’t work in practice, or at least hasn’t until now. That is why the selling that greeted yesterday’s product launch in Cupertino should be seen by traders and investors as just another opportunity to buy stock in arguably the world’s most successful company.
To be honest, I thought maybe this time would be different. The bounces following the ritual selling of AAPL on product launches have become quicker and sharper over the last few years, so when we learned the date of the current launch, I suggested buying during the approach of the actual event. My logic was that traders wouldn’t keep making the same mistake so a major selloff following the launch was unlikely. Yesterday’s 2.78% drop doesn’t really rise to the level of a major selloff and was even less than the previous day’s gains, but the fact is that the bears saw yesterday’s announcements as a reason to sell. That flies in the face of both logic and what was actually demoed at the event.
In theory, it makes sense on a surface level that continually increasing prices will put consumers off eventually. That is not what we see in practice, though, and that is due to two reasons: branding and the way most of us pay for our phones.
From a branding perspective, what people are missing is that as much as it upsets economists, consumers do not always respond to price in a rational manner.
I was in the wine business for a while and remember hearing a story about a wine brand that demonstrates that point. I was never able to confirm the story so I won’t say which brand but suffice it to say that it was in a wine category and of a grape variety that were traditionally cheap. An importer, frustrated with the low margins that offered, decided to try an experiment. They took one of the more consistent wines in the category and without making any other changes, more than doubled the retail price overnight. Sales increased.
There is a tendency among consumers to respond to the price of some products in a way that seems illogical to most economists, but when looked at through the lens of behavioral economics makes perfect sense. When something is essentially aspirational, a higher price increases rather than decreases its appeal. Thus, when consumers see a $25 wine in a category where everything else is $10 they assume it must be better. They even convince themselves it is better when they taste it, and nothing anyone could do or say would convince them otherwise.
Apple’s phones are more expensive than their competitors’, but still sales leaders. Whether that is because they are objectively better or just perceived to be is not the point. Perception is reality.
That is unlikely to change for quite some time, especially if we continue to pay for iPhones as most of us do. If you had to write an $1100 check for the new iPhone XS Max it is possible that many potential buyers would think twice. When all you do is sign on the dotted line, pay the sales tax and agree to an increase in your monthly bill at some vague point in the future, however, the bigger screen, faster chip and other upgrades are irresistible.
What you may have noticed is that so far, I have not mentioned the products unveiled yesterday except in passing. That is because how they are is irrelevant and failing to understand that is a common mistake. There will be a flood of articles offering earnest reviews of the new phones and the new generation watches. By all means, read them to decide which products you want to buy, but don’t base your investment decisions on them.
They should be made based on the fact that regardless of what the upgrades are, they will seem worth a few extra dollars a month to a lot of people, and/or that positioning the Apple Watch as a health device will convince a lot of people that what they previously viewed as unnecessary tech is now a “must-have” health essential. The more cynical reader will no doubt see that as an example of an evil corporation manipulating its customers, but that has been the basis of not just Apple’s success over the last decade or two, but of most successful companies in history, and as long as they succeed in doing that, AAPL will keep marching higher.