Last month
In earnings announced this week, steeper than expected revenue declines showed that consumers aren’t reacting to lower prices. Apple posted quarterly revenue of $50.6 billion well below revenue of $58 billion in the second quarter a year ago – net income also declined – one of the first disappointing quarters in over a decade. While analysts and investors were predicting some softness, the magnitude came as a surprise to some and shares in Apple stock dropped about 6% following the news.
What happened? Ask Uma Karmarkar.
Last year, Karmarkar, of Harvard Business School, and Baba Shiv and Brian Knutson of Stanford University, examined what happens to the brains of consumers under the influence of a “deal” and found that while we are swayed by the appearance of a deal, a price cut alone won’t prompt people to buy what they don’t want.
Through a spokesperson, Apple declined to comment on its overall pricing strategy, though Cook said, “we want even more people to be able to enjoy Apple Watch and what it can do for them,” when he announced the price reduction on March 21.
So while it’s early days for Cook & Co’s dive into discounting—Apple’s quarter ended March 26—Karmarkar’s research suggests that trying to woo non-iPhone users with a price cut instead of creating a new must-have innovation is unlikely to revive the company’s sales, at least in the U.S. though it may play better overseas. (Karmarkar didn't offer a comment specific to Apple’s news.)
Karmarkar and her associates published their work in the August issue of The Journal of Marketing Research. In the study, Stanford students were given $40 to “spend” then researchers observed responses to 80 potential purchases by measuring blood flow through the brain using a functional magnetic resonance imaging machine. The students sometimes saw discounted prices first, then the product, and other times, the product then price.
But for each product, such as clothes and electronics, they saw the products and prices together and were asked whether they wanted to buy the item. After, researchers queried the students to gauge how much they liked something on a scale of one to seven. They were permitted to keep what they purchased, or whatever money they didn’t spend.
At the same time the students were considering prices and products together, the researchers were observing neural patterns in the brain. They wanted to determine whether the activity was in the medial prefrontal cortex, the part of the brain that helps make value-based decisions or in the nucleus accumbens, otherwise known as the “pleasure center of the brain,” an area that often lights up when we like something we see.
The answer, researchers discovered, varied depending on what the subjects had been shown first. If it was the product, the activity was in the pleasure center. If it was the price, it was the value center.
Yet neither result, surprisingly, seemed to influence whether or not the subjects decided to buy the item. Whether they’d been shown price or product first, they acquired about the same number of items overall, and “liked” them at about the same rate. If you really like something, and you can afford it, you’ll purchase it.
A second part to the study looked at the effect of deals with utilitarian products like water filtering pitchers and batteries. In this case, 83 participants were shown either a discounted price or the product itself for a few seconds on a computer screen, and then looked at a screen with both the price and the product displayed. They were asked to evaluate their desire to purchase from 0-100.
This time, subjects were much more likely to buy when they saw the discounted price before the product—showing that, in certain situations, the presence of what appears to be a good deal affects consumer behavior, potentially overwhelming the question of whether or not we even want the item. It changes the way the brain weighs the products value from “Do I like this,” to “Is it worth it,” as Karmarkar told me last fall.
Anyone who can afford a pricey iPhone likely has one already, says Amit Daryanani, an analyst who recommends Apple with RBC Capital Markets,. But the new lower priced iPhone SE, which is selling well in China, attempts to expand the market, he says. “They’re trying to go after a market that’s much more price sensitive,” Daryanani says.
So the question is, do all the people who aren’t Apple customers yet, want the iPhone or Apple Watch? Do they “like” it enough and is it worth it? That’s a question Apple will answer next quarter.
