If Apple made a mistake with their iPhone pricing, it wasn't gouging early adopters, nor screwing them. It was listening to their customers and believing them.
Every time Apple comes out with a new product, they have the same problem. They just can't make enough to satisfy demand. Customers complain that they can't get it, and openly criticize Apple for not making more.
Apple is not stupid. They have been trying to fix this problem for a long time. One thing they've done is ramp up production, which has caused a general lowering of the initial quality of their products, causing yet another backlash.
Finally, Apple brought in an economist who, like John Gruber, but unlike Chris Biagini, understands the concepts of price and supply and demand. Since ignorance on both these pillars of economics seems so rampant, I am going to give it to you in a nutshell.
Price
The value of something is what you are willing to pay for it. That's it, and that's all. If you are starving to death, a hamburger may well be worth $599. If you are completely stuffed, a hamburger is completely worthless.
In formal terms, we call this the law of marginal utility. The marginal part has to do with the fact that the value of one hamburger does not affect the value of another, even to the same person.
If you're desperate enough to pay $599 for a burger, you probably won't be desperate enough after eating it to pay as much for the second. This facet of value comes into play again and again.
Price is a little trickier. When you're dealing with retail goods, like the iPhone, the seller has to set the price. What makes this tricky is the marginal utility of the items. Every person has their own idea of how much they are willing to pay for something.
A common misconception is that the value of something is somehow related to the labor and cost of goods involved in its manufacture. This is called the labor theory of value, and it's the one that Adam Smith subscribed to, even though he should have known better.
The labor theory of value is easily debunked by common sense. If I take a year to make a sweater, and you have an annual salary of $72,000, it follows that my sweater is worth $72,000.
However, since I am not very good at knitting, you wouldn't even be willing to pay me the $12 I spent on yarn. Let's say you were willing to pay me $5, since the sweater would at least make a good liner for your cat's bed.
If another person was going to an ugly sweater party and didn't have a smaller bill, they might be willing to pay me $20 for the sweater. I begrudgingly sell it to them. At that point, what is a Mike Lee sweater work?
A) Regardless of your cheapness, it's still worth $72,000
B) Since someone paid $20 for it, it's worth $20
C) Since someone would pay $5, it's worth $5
The answer, as it is so often, is C. The sweater is only worth as much as someone is willing to pay for it, which is currently $5. Since I am not willing to make another sweater at a $7 loss, and the ugly sweater guy is not willing to sell the sweater he just bought for $20, this leads us to the other pillar of economics.
Supply and Demand
Were you to ask every person in the world how much they would be willing to pay for an iPhone, you'd get a continuum that could be summed up as a series of numbers. Apple's series of numbers probably looked something like this:
Price People
$699 50,000
$599 200,000
$499 1,000,000
$399 10,000,000
$299 100,000,000
(Note these numbers are imaginary. I don't know how many phones Apple made for the launch, and I don't know what their actual goal is. I could look it up, but it doesn't matter. The point is the same.)
Since the price is what it is for everyone, Apple has to balance their willingness to sell the item at a certain price with the number of people willing to buy it at that price.
With the iPhone, however, there was a problem. Due to the time it took to perfect the design and the time it took to manufacture the phone, they could only produce 200,000 phones by June 29.
Since their ultimate goal was to sell 10 million phones, they could have just priced it at $399 and left the unlucky 9.8 Million who weren't willing to sleep in front of the store to suck on it.
As predicted by the law of supply and demand, when price is too low, demand outstrips supply and the price must rise or there will be shortages.
This is why when the government steps in to mess with pricing it always causes problems. Real world evidence of this is easy to find. Look at gas stations in the '70s, bread lines in Soviet Russia.
Apple's Mistake
For the first time in Apple product launch history, they finally got this right. They made the price of the iPhone high enough that 9.8 Million people were priced out and every person who wanted an iPhone enough to pay $599 for it was able to get one.
The problem is Apple's customers lied to them. They said they hated the fact Apple's supply could never meet demand. It turns out, they actually loved that.
Apple's customers loved the fact that, assuming you were willing to wait in line, you could have something nobody else could get no matter how much they wanted it.
People are pissed off because they waited in line and paid a premium, not because they wanted a great phone, but because they wanted to be haves and thumb their noses at have-nots.
Now, they feel look like jackass who spent $200 more than they had to.
Here's the thing about that though. That isn't Apple's fault. That's your fault. The anger and embarrassment you feel are caused by a defect in your personality.
When iPhones were available the next day, a guy in the Apple Store said he bet people who waited in line felt like jackasses. I told him that, actually, I not only waited in line, I sleep on the sidewalk, but as a matter of a fact, I did not feel like jackass.
The difference between me and a person who is angry about the price cut is that my enjoyment of the iPhone has no basis in other people's non-enjoyment of the iPhone. I am not a dick who makes purchasing decisions based on schadenfreude.
The other problem, of course, is that there are a lot of people who would not have been willing to buy an iPhone for $599 if they had known it would be $200 cheaper in a couple of months. Hindsight, as they say, is 20/20. That is also not Apple's fault.
First, if Apple has announced they were going to drop the price as soon as they had enough phones for everyone, it would have thrown off the numbers and the ruined the whole plan. They would have had a glut of iPhones, forcing them to lower the price, thereby causing a shortage.
Second, to think that a price drop entitles you to a refund is to misunderstand the way retail business works. Business is a simple proposition. I trade the produce of my labor for yours. If you agree to my terms, we shake hands and everyone is happy.
When Apple offered the iPhone for sale at $599 and you decided to buy it, the two of you entered into a contract. Apple agreed to provide you with an iPhone. You agreed to provide them with $599.
No part of this deal involves other people or other phones. No part of this deal states that Apple cannot turn around and sell the next guy a phone for pocket lint and bite of sandwich.
Yes, finding out someone else got a better deal than you stings a little. Nobody likes to feel like they got ripped off. Here's the thing though: you didn't get ripped off. You paid what you thought was a fair price. If you thought wrong, that's your problem.
To turn around and demand $200 back is to break the deal. If you got your 8GB iPhone box home and opened it up and it was a 4GB iPhone, you would be pretty pissed off. Well, you are doing the exact same thing, twice over.
Why I am angry
Yesterday I wrote a post called On Selfishness. It had a couple of problems. First, it was very long and covered a lot of different subjects. I don't think anyone actually read the whole thing.
Second, I was extremely angry when I wrote it. There were a lot of typos, and lot swearing, and a lot of threats of violence that were meant to be comical, but as I should know by now, violence is never funny, even when it's obviously meant to be joke.
The reason I'm angry is because innocent people are being hurt and that upsets me. A lot. I think anyone would agree that's a natural reaction.
If you feel entitled to $200 from Apple, you're wrong, but we can agree to disagree. That said, if you call or visit the Apple Store and yell, threaten, and insult the employees in pursuit of that $200, you are scum.
To abuse an innocent person for $200 is just immoral and disgusting. It literally makes makes me sick to my stomach. If you want to fire off an angry letter to Cupertino, that's your business, but when you start abusing the help, you're taking it too far.
The problem is we've developed this dance of customer service where people have learned that if they abuse an employee enough they will get what they want. That is evil, bad, and wrong. If you do that, you are an asshole, and I hope you get cancer.
So there.
That isn't Apple's fault. That's your fault. The anger and embarrassment you feel are caused by a defect in your personality.
Friday, September 7, 2007
Supply and Demand
