The Galaxy S5 is the latest and greatest example of the subtle and not-so-subtle price-dropping that’s been going on in the market

“Hello everybody. My name is <insert mobile phone company name> and I’m discount-holic.”

That’s right. Smartphone companies in India have a dirty little secret: they aren’t very confident about the price tags they put on their products.

Take the case of Samsung. The Galaxy S5 is the latest and greatest example of the subtle and not-so-subtle price-dropping that’s been going on in the market.

On April 11, Samsung introduced the Galaxy S5 at a price tag of Rs. 51,500. Within a week however, the device started seeing price cuts on various online retailers, with the price dipping to around Rs. 47,000-48,000. Last week, the price further dipped to around Rs. 44,000 and as of yesterday, the Galaxy S5 is available at Rs. 42,000 on Flipkart. (This is a price erosion of nearly 18 per cent)

This kind of price dropping is a little different from the usual price cuts that have been happening over the last few years. The standard formula used to be that a company would announce the launch of a Rs. 50k-priced phone and gradually drop the price after a minimum of two months, accompanied by a host of buyback and EMI offers.

These new price drops—which are restricted to online retail platforms only—are slightly different however. When one speaks to the heads of smartphone companies, they claim that online e-tailers and their sellers are the ones to blame. Now, to be fair, e-commerce companies have indulged in heavy price discounting in the past—and not just for smartphones, but for all sorts of consumer electronic products.

Needless to say, this kind of price cutting is terrible for the early buyers of smartphones—whoever had bought the Galaxy S5 on April 11 could have saved a neat Rs 8k if they had just waited a few weeks—and also for the overall distribution ecosystem.

So who is to blame? The smartphone companies or the online retailers?

There are three scenarios that I see here:

A) Smartphone companies are primarily spurring the price discounts. They are secretly sanctioning the price drops that are being carried out by Flipkart and Snapdeal.

B) E-commerce companies are the ones driving the price discounts, as they have done in the past with other consumer electronic products. The smartphone companies, however, silently approve (and maybe do some subtle nudging) as it serves their purpose.

C) E-commerce companies are the ones driving the price discounts, as they have done in the past with other products. Smartphone companies disapprove as it hurts their physical retail business.

A large part of deciding which scenario is correct depends on who bears the difference in cost between online retail and physical retail. Can e-commerce companies absorb the difference in cost simply because the MRP of most smartphones includes a good chunk for physical distribution? Or do smartphone companies and online retailers have a sort of loss-sharing arrangement in their quest for market share?

Nevertheless, I would rule out Scenario A – even for a company like Samsung— though companies could deploy this tactic on a case-by-case basis.

The more likely choices would be Scenarios B and C, with smartphone companies, depending on their nature and strategy, falling into either category. (Taiwanese phone maker HTC, for instance, falls into Scenario C. But more on that a little later.)

Decoding Scenario A and B

So what would be the logic behind either Scenario A and B? Or in other words –how do smartphone companies benefit by online retailer-only price drops?

A quick posit: smartphone companies believe that their high-end buyers are divided into two categories.

The first category of high-end buyers is a section of people who primarily buy online because they know exactly what they want. They don’t need to touch and feel the phone in question. They don’t need to be reassured by the guy behind the counter; they’ve already read a bunch of reviews and are well-informed. This type of buyer is usually the “gadget freak”, for want of a better word, who also searches for the best deal.

The second category of buyers is a section of people who purchase their phones from physical retail outlets. These people thrive on Veblen goods; they look at flagship phones as status symbols and have no particular affinity for one Android brand; they alternate between Samsung/HTC/Nexus and Nokia as their second phone after purchasing the latest offering from Apple. For these buyers, the act of purchase in a physical retail outlet is in itself a euphoric move that reaffirms their quest for status.

By slashing prices on Flipkart, smartphone companies can appease the first set of buyers without antagonizing the second category. Note that this works well only on the high-end (flagship) and the low-end (sub Rs. 10,000).

Decoding Scenario C

There are a set of companies, however, that don’t really approve of price drops – both for physical retail outlets and for e-commerce companies. Take HTC for example. The company has stopped supplying its phones to retailers who would supply exclusively to online platforms.

The company, according to HTC India Head Faisal Siddiqui, is working out ways to remove the price disparity between physical retail and online retail.

HTC, however, doesn’t receive many sales from online anyway—so its good-guy behaviour might not be all that altruistic.

In conclusion

If Scenarios A and B have even a modicum of truth to them, the real question is: Are smartphone companies screwing up their pricing in the Indian market, or are these price-drops an all-out effort to gain market share?

My guess would be that part of it’s a question of prestige. Any Android flagship phone today has to come with a Rs. 50,000+ price tag to simply prove that it’s a flagship. Unfortunately, in the unsubsidised Indian market, this doesn’t work out well if you aren’t Apple. Statistics show that nearly one out of every two smartphones sold in the Rs. 30,000+ category is an iPhone.

Thus you have the exorbitant price tag, accompanied with price drops and other discount- camouflaging schemes. Unfortunately, none of this is very good for the Indian consumer, who ultimately gets the short-end of the stick.