By moving quickly to mollify angry iPhone customers who paid $599 for a device that Apple now says is worth only $399, Steve Jobs retired a potentially difficult PR snafu. But the misstep might have greater ramifications for Apple as it moves from cult PC company to mass-market gadget maker, says a customer-loyalty expert.
It is a sign of the deep loyalty Apple customers feel that the iPhone price backlash has blown over so quickly, said Jim Kane, senior partner at Brookside, a Boston-based management-consulting firm focused on customer and partner loyalty. "When you build up enough loyalty, customers give you the benefit of the doubt," he said in a telephone interview.
While Apple loyalists took the news in stride, consumers whose first experience with Apple was in buying an iPhone, or perhaps an iPod, "have some hard feelings," Kane said.
The iPhone price cut is a watershed moment in Apple's history -- the first time Apple admitted to overcharging for a product, Kane said. To date, Apple has always adjusted prices by eliminating features and introducing new models at old prices, he pointed out, noting that, here, Apple simply cut the price on an existing model.
"Apple essentially said, 'Yes, we were overcharging you for it,'" Kane added, explaining that Jobs made an economic decision that with the new price, Apple will create "more new believers" than the number of customers it angered.
Jobs reacted to the firestorm by offering iPhone customers what has been called a rebate but in reality is a "gift certificate," said Kane. "This is where their integrity takes a little bit of a hit," he went on to say. "When you buy a $600 phone, you're not going to throw it out. You're going to keep using it and wish you'd only paid $400 for it."
That $100 gift certificate, which you have to spend with Apple, "doesn't make the feeling of being ripped off go away," Kane said. "Apple has to treat customers as individuals and not dismiss them."
Dangerous Waters Ahead
The snafu is indicative of the dangerous waters Apple is entering as it moves further into the mass market. "Apple has never been price-competitive. They've always built an audience on cool products that are different. They took that model to the iPhone," Kane said.
But in entering the cell phone market, he explained, Apple entered a highly competitive area where most people pay nothing for a phone. Apple is accustomed to requiring that customers adopt its worldview, Kane explained. The Mac is a tightly bundled package of hardware and software, and the iPod requires Apple's iTunes. So far so good. But with the iPhone, Apple imposes a new level of loyalty on customers -- one to AT&T.
"More than anything else, this exclusive relationship with AT&T caused a lot of people not to buy the iPhone," Kane said. People simply didn't want to break their existing contracts with other carriers, he noted, and were planning to wait until they expired before buying an iPhone. Now, with the price cut, these people might very well be glad they waited.
"All I had to do before was make a commitment to Apple; now I have to make a commitment to Apple's partners," he said. "Loyalty has to be freely chosen," Kane concluded. "Are people truly loyal or are they held hostage? When people feel they don't have a choice anymore, that will erode their loyalty."