Memo to Steve Jobs: fix these customer issues before they fester

I may be an Apple fan, but I do think that Jeremy Horowitz over at iLounge.com has brought up four legitimate customer issues Apple should fix. I attribute these issues -- defective iPod touch screens that Apple charges a restocking fee to take back, "Made for iPod" accessories that Apple broke with the new iPods, et cetera -- more to neglect than malice, but that doesn't mean that Apple can ignore them.

Apple needs to get a customer-advocacy SWAT team together and make these customers happy again. A happy customer will tell their friends about their experience, but ones that feel they've been wronged will tell everyone they know -- and that just erodes all the brand work Apple has done over the past decade. And if it means another apology from Steve Jobs, so be it. Apologies are always better than lost customers, regardless of whether you are a $25 billion company or a Mom and Pop shop.

Technorati Tags:
Apple, Brand, Customer experience, iPod, iPod touch, Marketing, Jeremy Horowitz, Made for iPod, Games, Steve Jobs

The gutsy marketing and strategy behind Apple's iPhone price cut

The iPhone price cut appears to be the story that will never die. Leander Kahney at Wired News and I had a great discussion yesterday about the what and why behind the iPhone price cut. Some of what we discussed ended up in the Wired article here, titled, The Perils of Taking the IPhone Mainstream. But there was actually some background and analysis that Leander didn't use, so I thought I would fill in that back story here.

First, here's one of my quotes from the article:

According to Howe, Apple initially priced the 8-GB iPhone at $600 not to milk early adopters, but to purposely constrain demand. While production ramped up at its Asian factories, Apple wanted to restrict buyers to the relative few happy to pay $600 for the phone. Nonetheless, Apple went on to sell a million iPhones in the first two months –- a clear indication of the device's popularity.

Then, as it became clear there was enough factory capacity to produce millions of them in time for the crucial holiday season – when sales explode -- Apple dropped the price to take the gadget mainstream.
With Tuesday's launch of the iPhone in Europe, it's clear that Apple is confident it can satisfy demand in multiple countries.

"(Apple) said they'd like more time before dropping the price," says Howe, "but you can't move the holidays. Clearly, Apple's gearing up for a big holiday season."

Apple has good reason to be gearing up for this holiday season based upon its experience with the iPod. Steve Jobs made an incredibly gutsy call last year in the spring when he told manufacturing to gear up to make more than 20 million iPods to sell over the holidays. Why was it gutsy? Because Apple had never sold more than 14 million iPods in a quarter before. Yet the decision had to be made, and Jobs and his team made it. And it is sounding like Jobs has recently made that same decision with the iPhone by doubling iPhone production for this holiday season too.

But back to the price cut. One London analyst firm has asserted that next year's average selling price for the iPhone will be $200:

"In our projection, we believe there will be about 18 million iPhones sold next year at an average selling price of about $200, and that means a very sizable portion of total handset revenues will move from other manufacturers to Apple. (It) will be in the vicinity of 5 percent that Apple will steal from incumbents."

Not to be outdone, the New York Times asserts that the price might go to zero:

"The iPhone could have an overall impact on the economics of the phone industry. It has put a hardware manufacturer in a highly unusual position of strength relative to the carriers (Verizon, AT&T, etc.). They’re accustomed to calling the shots about what devices get access to their network; not so with the iPhone. It carries its own weight with consumers.

Mr. Saccanaghi, after discussing the issue with various players in the mobile phone ecosystem, estimates that AT&T could afford to pay Apple $15 a month over the lifetime of a two-year contract. That adds up to $360 in payments. And that’s considerably more than the $200 to $350 that AT&T pays other retailers (like Best Buy, Radio Shack) for customer sign ups, Saccanaghi writes.

What does it mean?

Apple could conceivably sell the iPhone hardware at a substantial loss while still generating greater profit per iPhone than it does from the highest-end iPod.

Sounds like a good deal for Apple, with a caveat. If Jobs decides to drop the price of the iPhone, he might consider offering a rebate to existing customers beforehand."

So with production ramped up for the holidays, is Apple going to follow Motorola into the downward price spiral of death?

Oh sure. And it will happen right after Steve Jobs attends an ice skating party in hell with bad Muzak.

What people don't get is that Apple is waging a marketing war to reshape the value chain for the mobile phone industry. Everyone is trying to figure out which trench Apple is occupying, when Jobs is flying in jet fighters for surgical strikes.

Consumers value what they pay for. They don't value things they perceive as free. And that's the marketing blunder the US mobile phone market has bought into over the last 10 to 15 years. By bundling "free" and generic phones with cell phone service, mobile carriers have devalued both the brand values of the handset makers and their own services. The handset makers are hurt because the low values that carriers will pay for free phones eliminates the incentive for those manufacturers to do anything but cut costs. The carriers are hurt because they have to pay subsidy fees to the handset makers of anywhere between $150 and $250 over a two-year contract to actually buy those free handsets. You've heard of a win-win deal? This is a lose-lose deal.

What Apple has done is inverted the value proposition. It has created a phone that consumers see as sexy and desirable, so desirable in fact that they will actually pay $400 to $600 for one (depending on geography). And because the device is desirable, Apple can demand exclusive deals with carriers, which creates valuable differentiation for those carriers that have iPhones and disadvantages for those that don't (yes, I'm talking about you, Verizon and Vodaphone). Because Apple is providing valuable carrier differentiation, Apple can then capture the subsidy revenue stream that the carrier would have normally paid to the handset manufacturers anyway for "free" (and undesirable) phones.

Now, if Apple were to cut the iPhone price to zero, would any of this be happening? Not a chance.

So Apple is going to use its iPod playbook all over again. The original 5 gigabyte iPod went on sale for $399 in 2001. Today, a 16 gigabyte iPod touch sells for -- you guessed it -- $399. Apple chose the price points based on consumer demand and interest. A constant set of features will move down the price scale to more value-oriented price points, but Apple will introduce new and even more desirable products at the old price points. And so long as it can keep that engine going, it will make money hand over fist. And the rest of the handset makers will bang their heads against the wall trying to figure out how they do it.

Don Reisinger at CNET's Crave recently recently asked the question, "Is Steve Jobs really smarter than anyone else?" in this way:

"In the United States, GSM carriers are not the only option, and more often than not, people are willing to go with Verizon Wireless or Sprint Nextel, regardless of the inability to easily switch between the aforementioned companies.

But in the U.K., the economical landscape is much different. In fact, most Britons are more than happy to change carriers and are keenly aware of the terms 'unlocking' and 'SIM cards.' In fact, many people in the U.K. have already purchased an iPhone in the States, brought it home, unlocked it and added it to their own carrier.

Steve Jobs knew that the U.K. is rife with unlocked phones and exclusively GSM coverage. And by looking like the best friend to O2, he's effectively pulling the same trick out of his bag: tell everyone they can only have an iPhone on one carrier, ignore unlocking, take the revenue from O2, and enjoy higher hardware sales due to simple unlocking procedures. Once completed, head to France and Germany, rinse and repeat.

It's amazing to me just how much control one device wields all over the world. Can you think of any other product that could command such respect from a massive cell phone carrier and create a whole new way of doing business in the cell phone industry? I certainly can't.

I can't either. That's because Apple combines award-winning designs with some of the best strategy and marketing in the world. And as long as the press and Apple's competitors keep focusing on the price cuts instead of the strategy and consumer desires, it will continue to reshape the mobile phone industry to its own advantage -- and in the process make its investors a lot more money than anyone wedded to the old mobile phone business expects.

Full disclosure: the author owns Apple stock.

Technorati Tags:
Apple, ATT, Brand, Customer experience, iPhone, iPod, iPod touch, Marketing, New York Times, Price cut

Lessons from my son's iPhone

My 14-year-old son has saved his allowances and earned money all summer to purchase an iPhone. And after the early Christmas present that Steve Jobs delivered on September 8 -- the $200 iPhone price cut -- he finally scrounged enough money to actually buy an 8 Gigabyte refurbished version for $349 from the Apple Store. And last night his long-awaited purchase arrived, as can be seen below.

I'll spare readers the blow-by-blow, but I will touch on the highlights of iPhone unboxing night last night:

1. Refurbished iPhones come in white boxes. We've bought refurbished products form Apple before, and they've traditionally arrived in brown cardboard boxes advertising their lower cost and refurbished status. But refurbished iPhones break that tradition by arriving in a clean white Apple box with the Apple logo on the top. This nicely sets them apart from new iPhones that come in black boxes. But even more intriguing, Apple appears to have optimized the packaging yet further -- the white boxes are, to my eyes, about two-thirds the size of the new iPhone boxes.

[Robert enjoying the unboxing experience. "It's so small and shiny!"]

2. Not all AT&T accounts are created equal. We've been AT&T wireless customers for about 10 years. That means we've been through the sale of AT&T wireless to Cingular, and Cingular's sale to SBC, and the subsequent rebranding of Cingular to AT&T. And our reward for 10 years of loyalty? We couldn't activate Robert's iPhone on our AT&T family plan because our account was "on the blue system" of Cingular instead of the good "Orange side." We called AT&T, and they literally said they couldn't help us over the phone; we'd have to go visit an AT&T retail store and trade in our old phones for new ones.

So we trekked over to Small World in Acton, MA (an AT&T franchisee, not a corporate AT&T store), and a wonderful gentleman there made it all better with nearly an hour and a half of fussing with the AT&T systems. The bottom line: since I had an unlocked phone (my Nokia E61i), I only needed a new SIM card. But since my wife's ancient Nokia 3650 was locked to the old AT&T wireless, she'd need a new Nokia phone -- which they didn't have in stock. Now given we had a child who had just spent $350 that he saved for months and was dying to turn his iBrick into an iPhone, we asked if there was any way we could get this done today rather than waiting for a phone shipment. To Small World's credit, the agent electronically activated our new SIM cards, transferred a phone from another store, which the agent would personally pick up and deliver tomorrow, and got us up and running after only an hour and a half of customer service calls, computer entries, and activation hassles. We were pleased and astonished at the amount of work the agent was willing to do to help us, but we were similarly appalled by how customer-hostile the back-end systems were he was fighting with.

3. Once our plan was right, the iPhone experience was flawless. Once we got home with our new plan activated and our wallets lighter for the experience, Robert fired up iTunes and activated his phone. Within five minutes, he had a phone number and a working phone on our family plan. The contrast with the AT&T store experience was like night and day; it was just click, click, click, and go.

So now I have a son with an iPhone, a family AT&T plan "on the orange side", and a wife with a new Nokia. And even with less than a day's experience, I already have some takeaways from the transaction.

1. Even with my recent vintage Nokia mobile, I'm jealous of my son's phone experience. As I've written before, the specs on my Nokia E61i far surpass those of the iPhone; it has 3G data, WiFi, video recording, zoom camera, installable software, and countless other whizzy features. Yet, I'd trade my phone for even a 4 Gig iPhone in a heartbeat. Why? Because I've spent nearly two months configuring my phone to do about half as much as my son could do within minutes of unboxing his phone. The experience of using my Nokia compared to the iPhone is comparable to using PC DOS compared to Mac OS X. The former is painfully functional but never helpful, while the latter is delightful and simple.


2. The iPhone is going to undermine cellular carrier's business as usual The experiential difference between an hour and a half activation at a store and a five minute activation at home is huge. Add to that fact that iPhone purchasers are paying full retail prices and signing up for unlimited data plans, and you're seeing significant cream-skimming of the mobile phone market by Apple. Don't be surprised if Apple gains even more power over the mobile phone carriers simply because of the massive buying power that iPhone customers will come to represent. And in the process, manufacturers of "free" carrier-subsidized phones are going to be at a significant disadvantage competing with Apple's high customer satisfaction (and even higher margin) business model.


3. AT&T still has significant work to do. The whole "blue versus orange" distinction, while understandable, is something AT&T has to fix and fix fast. The store agent said that they plan to require all customers to be "on the orange side" by March 2008. But the fact that we had to buy at least one new phone, spend $130, and commit to new service contracts just for the privilege of adding an iPhone after being 10-year loyal AT&T customers leaves a bad taste in my mouth. Somewhere in AT&T there must be a person in charge of customer experience who should be forced to go try to put an iPhone on a blue AT&T plan every day until he gets the service fixed. As it stands now, it's the biggest blemish in the iPhone experience.

Bottom line: While the Nokia E61i is less than the sum of its specifications, the iPhone experience is more than the sum of its parts. Apple has raised the bar about six feet on what users should expect from a mobile phone. And when even a high-school kid can save his money and buy his own iPhone, that experience isn't just for a few well-heeled technophiles; it's going to affect everyone who owns a phone and every carrier who sells them.

Full disclosure: the author owns Apple stock.

Technorati Tags:
Apple, ATT, Customer experience, iPhone, Marketing, Mobile phones

Can HP do what's needed to become a great marketer?

Last week, Hewlett Packard announced it will hire Michael Mendenhall, a 17-year veteran of Walt Disney Company, to be its new Chief Marketing Officer. Given HP's struggles to market its PC products, I think this move is long overdue. And I think Mendenall is the ideal candidate to turn HP's marketing around. Why? Because few companies understand consumers and marketing better than Disney, as was illustrated by a trip I took to visit the Mouse several years ago.

I took my late Dad and my family on a Disney land/cruise combination trip back in 2000. For those who aren't familiar with these deals, you get four days at the Walt Disney resorts in Orlando and access to the parks, followed by a three day cruise in the Carribean. You're given park passes in the form of magnetic stripe cards that also act as your room keys to your hotel. And we thoroughly made use of those passes, wandering from our Boardwalk hotel to Epcot to Walt Disney World for those full four days, sometimes eating in the parks, and at other times at our hotel.

The full magnitude of Disney's marketing integration only became apparent when we left Orlando for the Port of Miami and our cruise. When we boarded the Disney Wonder, we discovered that our Disney passes, which had been our room keys in the park hotel, also unlocked our stateroom on the ship. And when we sat down to eat in the evenings, I was surprised to hear the waiter suggest wines that were similar to, but a step up from, the wines we'd been enjoying at Disney World. Unknown to us, Disney maintained a running list of our preferences and purchases. And our waiter, who was in many ways our personal ambassador to the ship experience and followed us from dining room to dining room, both had access to and was trained to make suggestions based on that purchase history. In short, we were quietly and subtlety marketed a better experience based on our prior Disney experience. And I fully expect that if we returned, that experience would continue from where it left off seven years ago, with age-appropriate adjustments for our now much-older kids. Disney's systems really are that sophisticated.

Disney's great marketing came from a commitment by Walt Disney to create the best customer experiences possible. We don't yet know if a similar commitment is forthcoming from HP, but I do know this: if Mendenhall brings even half of the marketing sophistication that Disney has in its resorts to HP, it's going to create a much better customer experience than it has today. The big question will be whether HP's IT-centric and customer-unfriendly culture can accept the need for such integrated marketing and the big changes needed to make it happen. Let's hope it does.

Technorati Tags:
Marketing, Brand, Branding, Customer experience, Disney, Hewlett Packard