Apple AAPL , which reportedly plans to cut its production target in half for the iPhone X because of slower-than-expected sales, faces a pricing dilemma. If it cuts the price of the iPhone X to spur sales, it risks compromising its profits and premium image. If it sticks to the $1,000 price point, it risks disappointing sales for its flagship phone.
Apple created the pricing problem when it bifurcated its product line into two sets of phones—the ho-hum iPhone 8 and iPhone 8 Plus and the innovative iPhone X priced at a huge premium. The move has clearly backfired: The bragging rights for the iPhone X aren’t attracting enough customers, while the iPhone 8 and 8 Plus pale in comparison to the X’s innovative features like Face ID and OLED screen.
If Apple cuts the price of the iPhone X, would also be forced to lower the prices of the iPhone 8 and iPhone 8 Plus to preserve the premium position of the iPhone X. Lower prices for all three would be a big profitability hit, as well as an admission that Apple stretched too far when it set a new price benchmark.
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So what can Apple do? One option is to adopt the “car dealer strategy,” by offering incentives through its sales channels so that sellers such as Verizon VZ , AT&T T , T-Mobile TMUS , Best Buy BBY , and others could offer special deals—for example, a $200 “special” incentive discount. Such discounts are the backbone of new vehicle sales in car dealerships, with incentives and special offers that make buying a car cheaper, without lowering the list price. Offering discounts through the sales channel would allow Apple to claim victory on selling a $1,000 phone—a price point no other manufacturer had the guts to even think about implementing—and consumers would never be the wiser as to where discounts originated. Smaller dealer discounts, such as $100 or $150, could be offered on the iPhone 8 and 8 plus, respectively, to keep the price differential, and boost their sales, as well.
One caveat is that makers of premium or exclusive products don’t typically allow significant discounts off the list prices in the sale channel. Canada Goose parkas, for example, rarely go on sale and aren’t sold through discount online retailers. Likewise, Louis Vuitton adopts a “never goes on sale” mantra as part of its branding. Would an iPhone X that’s not purchased for $1,000 still have the same cachet?
Nonetheless, channel discounts are not unheard of in mobile phones. Samsung often will do periodic promotions, such special discounts for its Galaxy 8 phone over the holiday shopping period. One wrinkle, however, is that the sales channel would control the discounts. It might be possible for a retailer to take the $200 discount incentive from Apple, pass along $100 in savings to the consumer, and pocket the other $100.
But price is not the only problem for the iPhone X, which was meant to be so superlative that Apple skipped right over “9” in its numbering. Apple also tried to set a new benchmark in functionality with the iPhone X, which arguably has not materialized. Face ID is very innovative and works well, but it is not enough to justify a $1,000 price. The OLED screen is beautiful, but it’s not new. Samsung, Apple’s supplier, uses OLED screens in all its phones. (Ironically, Apple’s sales disappointment also means a hit for Samsung, which reportedly makes $110 per iPhone X for supplying the OLED screen.)
The iPhone X also has an annoying design glitch: a “notch” for the Face ID app, which interrupts the seamless, edge-to-edge display of the OLED screen. Apple will undoubtedly find a way to correct this awkward design feature in future releases of its phones. This leads us to the question of what Apple should do when it unveils its next suite of products in September.
Instead of perpetuating the bifurcated market, Apple needs to upgrade the features of its iPhone 8 and 8 Plus. It could adopt OLED screens across all three products or it could put Face ID into all its phones. It can reserve one of the premium features for the iPhone X (or its successor), as well as offering a larger screen measuring 6 inches or more. The key will be improving functionality and features for the iPhone 8 and 8 Plus, and then raising their list prices by $50 or $100, respectively. That will keep the iPhone X as an aspirational product, while narrowing the feature and price gap between the iPhone X and its smaller siblings.
Mohanbir Sawhney is a professor at Kellogg School of Management at Northwestern University.