Apple As An Aspirational Brand

Aug.15.14 | About: Apple Inc. (AAPL)

Summary

Apple can be an aspirational brand in BRIC countries, but needs to have entry level products that are less unattainable.

The impact of somewhat lower-priced entry level products, such as iPhone 5c, is a dramatic increase of sales in BRIC countries, although never to mass market levels.

The dramatic expansion of the iOS user base in BRIC countries that will result is an opportunity that will be too good for Apple to pass up.

My last article "Why Apple Won't Build a Cheap iPhone. . . And Why It Should" received numerous comments railing against my violation of Apple (NASDAQ:AAPL) orthodoxy (Thou Shalt Not Build a Cheap Product). Apparently many of the commenters didn't bother to read the article, or else they would have realized that the title was facetious. In the article I made clear that I wasn't advocating that Apple build a cheap iPhone.

The Geography of Aspiration

I often receive comments on my Apple articles that betray an ignorance of the article contents, but what caught my attention this time was repeated references to Apple as an "aspirational brand." The concept does have some merit, and I felt it was worth spending an article to explore it.

First, let me propose some defining characteristics of an aspirational brand, based on Wikipedia's brief article on the subject. Typically, aspirational products are not affordable by the majority of the consumers, but about 30%-60% of the market either can afford the product or believes they will be able to do to so in the future. So an important feature of an aspirational brand is that it's just slightly out of reach of most consumers, but not so far out of reach as to be unattainable forever.

Aspirational brands typically enjoy a high reputation (for quality, innovation or some other discriminator) that allows them to charge a premium price. The Wikipedia article also makes reference to the snob appeal of aspirational brands as addressing the need for "invidious consumption", consumption intended specifically to provoke the envy of others.

So, is Apple an aspirational brand? The answer really depends on what part of the world the consumer lives in. In the United States, Apple clearly does not meet the criteria of an aspirational brand, since its products are affordable by the masses. On Verizon, the 16 GB iPhone 5s sells for $100 with contract, putting it on par with the $100 Samsung Galaxy S5. Despite pretensions to the contrary, the iPhone is a mass market item, like every other smartphone.

Apple's smartphone ownership share also belies the concept of the aspirational iPhone. As was widely reported earlier this year, NPD Group found that Apple's ownership share of the U.S. smartphone market had grown in 2013 from 35% in 2012 to 42%. Such a large ownership share clearly indicates that iPhone is not out of reach of most consumers in the U.S., except perhaps adolescents on an allowance, for whom iPhone might well be aspirational. In the U.S., Apple is a maker of mass market personal electronics, and Apple's goods appear in big box retailers such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT), hardly the venues of an aspirational brand.

And what is true of Apple in the U.S. also applies to Western Europe, where its products are also quite affordable, although usually with lower user share. Outside of Western Europe, the issue become more uncertain. I'm sure there are many poorer parts of the world where Apple is effectively an aspirational brand, but I would like to focus for now on the BRIC countries, widely acknowledged to be a battle ground for the "next billions."

In the table below, I summarize median incomes for the BRIC:

Country

Median Household Income or Average Per Capita Income

Reference

Brazil

$678/month

median household, 2010 Census

Russia

$851/month

average per capita, Wikipedia

India

$616/year

median per capita, Business Standard

China

$852/month

average urban household, Forbes

Click to enlarge

The definition of aspirational is fuzzy enough that one could call Apple an aspirational brand in BRIC, but the problem for Apple is not the lack of exclusivity, but the lack of attainability. In BRIC, Apple needs to become more aspirational, in the sense of becoming closer to the reach of more consumers.

Aspirational Impact

The impact of becoming somewhat more attainable in BRIC countries, where carrier subsidies are usually absent, is what Benedict Evans was getting at in his article "Note on Cheap iPhones," so let me return to the graphs I presented in the last article, highlighting some things relevant to the aspirational brand question. In the first chart I plot Evans' demand function data, which the reader should note represents unit sales per quarter, along with some curve fits:

Note that Evans is saying that a $300 unlocked iPhone sells 30 million units per quarter, almost doubling iPhone shipments. In the following chart, I plot the impact on quarterly gross profit:

In this chart, I use a curve fit to Evans' data (the yellow curve) to plot the impact of price point to total gross profit/per quarter on sales of the entry level iPhone. The curve has a broad flat region where changing the price point has little impact on gross profit. The higher sales volume at the $300 price point produces less profit than Apple's current entry level iPhone 4s non-contract price of $450, but not much less: $2.8 billion vs. $2.97 billion. Gross margin decreases fairly dramatically, from 55% to 33%, but gross profit does not. The point here is that Apple has an opportunity to dramatically increase its unit sales and market share, without a significant sacrifice in gross profit. This is why I advocate that Apple accept lower margins.

Lowering the price to $300 doesn't make iPhone a cheap, mass market phone in these countries, since even the $300 price is still unaffordable for most consumers, but it does put the phone a little closer to the economic reach of consumers.

This isn't about building a "cheap" iPhone or otherwise cheapening the brand. Apple already builds entry level phones such as iPhone 5c. This is about accepting a lower margin on the entry level phones Apple already builds, and lowering the price of admission to the iOS ecosystem. Given the dramatic impact on sales volume and the consequent enlargement of the iOS user base (itself a significant source of follow-on revenue), I think that the $250-300 unlocked iPhone is a no-brainer for these markets.

Too Good to Pass Up

When Apple debuts its new iPhone in September, I fully expect the unlocked, entry level cost to fall. How much is a good question. I doubt Apple will be willing to lower prices so dramatically as to reach the $300 level immediately. Instead, Apple will cautiously test the waters, first with a $400 unlocked phone, then lowering the cost progressively in 2015. Here, the limiting factor is how rapidly Apple can expand production, as well as ensure the necessary services and support commensurate with a high quality Apple experience that Apple will want to provide to these new users.

But the lower price points and millions of new iOS users will follow the arrival of Apple's flagship phones in September. Despite the protestations of the faithful, the opportunity is just too good to pass up.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.