29.03.2023

Why Tim Cook was wrong to compare the iPhone X to the price of coffee

In fact, Beth McMillan, a Ph.D. student from the University of Oxford, calculated the “latte factor” and found that if someone were to save the \$3.19 it costs for a latte (according to her analysis) for 50 years with a 6% interest rate, he or she would end up with \$337,942.69. That would pay for an iPhone X at its current price every five years for 50 years (\$9,990) and a \$95 monthly bill for the same length of time (\$57,000) more than five times over.

Instead of buying expensive cups of coffee, consumers are told they could set aside the money to save enough for a down payment, a wedding, retirement and, now, even the iPhone X.

Apple’s AAPL, +2.64% chief executive officer, Tim Cook, compared paying for the newly released iPhone X, which starts at \$999, to buying expensive coffee yesterday. Most people pay for the iPhone using a monthly plan — in his example, \$33 a month for the iPhone X, which would be equivalent to less than a coffee a day at “one of these nice coffee places.”

He’s not the first to relate expensive purchases to the cost of a cup of coffee — savvy consumers have long suggested that if people were to skip their lattes, they’d be able to save for a down payment on a home or car, pay off a wedding or have a substantial retirement fund.

The average cup of coffee in the U.S. is roughly \$2.70, according to an analysis of coffee prices across the country by software company Square. The average price of a cappuccino was \$3.51 and a latte was \$3.78.

But is it right to compare such expensive purchases to cups of coffee? Experts say it depends what people do with the comparison — using it to set priorities can help consumers, but to justify a hefty price tag can hurt them instead.

On the one hand, Cook was smart from a marketing viewpoint to make the comparison. Thinking of expensive purchases in smaller increments: a \$1,000 phone compared with 200 cups of \$5 coffee makes it easier to justify the larger expense. Why? It’s an easier amount to spend.

Case in point: People are less likely to spend a \$100 bill than \$10 bills 10 times over, a study published in the Journal of Consumer Research showed. They don’t want to part with the larger denomination. They also fear they’ll spend all of the \$100, the researchers found.

On the other hand, frittering your money away every day on small items like coffee should not be used to justify a bigger expense for a luxury item such as the iPhone X. “It’s dangerous when you equate everything to a cup of coffee because it’s so easy to dismiss it”, said Vincent Barbera, a financial adviser at Newbridge Wealth in Berwyn, Penn. And, not to split hairs, Cook is referring to “fancy coffee”, as opposed to a regular cup of coffee, which could be much cheaper.

And that justification — buying the \$999 iPhone X — will not necessarily change your other wasteful behavior. “Sure, it might be the cost of your latte a day, but if you’re still buying that latte — and let’s be honest, most people will — then you’ve just added another expense and not replaced one you already make daily”, said Erin Lowry, author of “Broke Millennial: Stop Scraping by and Get Your Financial Life Together.”

Instead, a fairer analysis would be comparing the price of the iPhone X to a necessity, such as decreasing the heat in the house by a couple degrees on a cold winter day. That way, the consumer can actually balance luxuries with necessities, said Barbera said.

And, since not everyone drinks coffee, another accurate way of gauging spending habits and building savings goals would be more personal to the shopper, such as calculating how much of a weekly purchase they value would cost in comparison to the iPhone, such as bought lunches or cocktails.

So Tim Cook is both right to make the comparison as a reality check against overspending, but wrong to use it to justify an iPhone X, Andrea Blackwelder, founder of Wisdom Wealth Strategies in Denver. “Most people have a latte factor of some kind”, she said.