You can’t let your past cannibalize your future – Note on iPhone 5 Sales

Image representing Apple as depicted in CrunchBase

You most likely know by now that Apple is cutting back its demand for iPhone 5 components. Analysts who did the supply chain check attributed to the slowing iPhone 5 sales. And among the many reasons they quote the one that stands out (and probable) is

The less-expensive iPhone 4 and 4S is eating into iPhone 5 sales. With a two-year contract, the iPhone 4 is free and the iPhone 4S is $99, and they might be popular enough among consumers that not everyone is opting for the iPhone 5, which costs $199 with a two-year contract in the U.S.

The number to watch out for in Apple’s earnings report is the average selling price (ASP) of iPhone line. We have seen similar drops before when Apple decided to keep its $399 iPad 2 product. Now it appears it is iPhone’s turn.  (By the way, you can learn a lot from earnings reports.)

This is basic second degree price discrimination – when offered multiple versions at different price points, customers self-select themselves to the version that offers them the most consumer surplus. But to execute effectively on the multi-version strategy the business must raise appropriate version fences such that those who have higher wherewithal to pay and prefer the higher priced version are not tempted by the lower priced version and switch down.

In case of iPhone 4 and iPhone 4S, these are extremely very well done products that offer lot more value especially when combined with the lower prices they are being offered at. And these older (yet superb) models are cannibalizing iPhone 5 sales.

Most people say, “it is better your products cannibalize your own than others doing it to you”. While no cannibalization is good, that statement would make sense if newer higher profit generating models replace your older models before your competitor does that to you. You can’t however let your past cannibalize your future. It also says something about your future product pipeline.

I also don’t believe we have seen the end of iPhone downturn. Here is what I wrote in GigaOm about effect of iPad mini (before it was released)

iPhone: The crown jewel. It is harder for most to see how a smaller tablet could threaten the iPhone. Consider this in the context of total cost of ownership of an iPhone over two years: At $100 per month for mobile service fees and at $199 for the device, it costs $2,500. Mobile service providers are moving towards just one bundle of voice and data at $100 per month. If there were a $299 4G iPad Mini, some may consider a regular phone for occasional talking and the iPad Mini with $40 data fee as an iPhone replacement.

Is Apple, a company that is unusually excellent (here, here and here )in multi-version pricing strategy, starting to stumble?