iPhone buyers who finance full-priced smartphones are more likely to open their wallets and pick the flagship -- and most expensive -- iPhone 5S than U.S. consumers sticking with the subsidized-purchase model, analysts said today.
In the July 2013-March 2014 timespan, the iPhone 5S was selected by 73% of those who financed the purchase, said Consumer Intelligence Research Partners (CIRP), a Chicago-based firm, citing a survey of 1,500 American consumers. Meanwhile, about 58% of those who bought a subsidized Apple smartphone went with the 5S.
In the U.S., all four major carriers -- AT&T, Sprint, T-Mobile and Verizon -- offer installment plans that require the consumer to pay a monthly fee for a phone, which is priced at its full, or unlocked price. Rather than pay $199 for a 16GB iPhone 5S at the time they sign a two-year contract, consumers can instead pay about $27 each month -- the carriers don't add interest charges -- to account for the iPhone 5S's $650 full price. The latter group does not have to sign a long-term contract, and can generally upgrade to a new phone in just over a year.
The skew towards the upper-end iPhone by consumers opting for installment caught CIRP analysts by surprise. But they said it made sense.
"When customers are paying the full price of their new phone, the common prediction was that they would gravitate toward less-expensive models," said Josh Lowitz, co-founder of CIRP, in a note to clients. "The carriers' decision to offer interest-free 24-month financing seems to have more than counteracted that pressure. When confronted with a payment difference of less than $10 per month, iPhone buyers have chosen to buy the higher price, premium phones."
Buyers comparing the price of a subsidized iPhone 5S against that of an iPhone 4S face a difference of $199, as the latter is free with a two-year commitment. But when paid in installments, the monthly difference at Sprint is just $8.34 (over 24 months), at AT&T $10 (over 20 months).
It's perception and psychology, the same that softens sticker shock at the car dealership and leads buyers to opt for higher-end vehicles when they lease.
"A decision whether to buy a subsidized iPhone 4S, 5C, or 5S means a big difference in spending, $100, $200, or more -- or immediately spending double or more," Lowitz said. "In contrast, unsubsidized phone prices tend to differ by about 20%, and when they are broken into 24 payments, they are truly marginal."
Installment plans boosted sales of the iPhone 5S and depressed those of the iPhone 4S, the 2011 model that Apple uses as its entry-level phone. Of those who financed an iPhone, only about 4% selected the 4S, compared to about 18% of those who bought a subsidized iPhone.
For the iPhone 5C, the new, lower-cost model Apple introduced last year, about the same percentage picked it who took the installment path as chose the subsidized price.
Apple is expected to roll out one or more new iPhones this fall, most likely with larger screens.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is email@example.com.
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