Decision Science: How do You Choose, What is the Best way to Buy a New iPhone? - Black Friday Deals, Analysis and Results

Retailers and phone companies are notorious for marketing tactics and hidden fees that drive consumers to spend more money without realizing it. The best deals are often hidden in plain sight among a flurry of terms and conditions and some number of easy payments, even more so during seasonal holidays and especially around Black Friday.

When the time comes to get a new phone, do you make that deal with the devil and sign away your hard earned cash, for monthly payments and a brand new iPhone for zero $0 down? How about if you're a skeptic who never signs anything for payment plans come hell or high water so you'll pay full price at Apple and get an unlocked iPhone. Perhaps you're somewhere in between, you're willing to pay a little $ up front in exchange for slightly lower monthly payments?

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How do you decide,
what is the best way to Buy a New iPhone?

If you think about it, the question really comes down to just two variables:

1. How much $ is this going to cost me up front?
   and,
2. How much will I have paid to the phone company after my 2 year contract is up? (assuming no overages, shmg...)

Let's say we're considering four distinct options, each with similarities and differences that result in different combinations of price. If we setup a table with everything mapped out per option we should be able to learn a little bit more about the true nature of each of the four offers.

For example, Available choices for getting a New iPhone 8 64GB and a Data Plan with a Carrier:

1. Go to Apple store and pay full price for the unlocked phone and get a no contract 'pay-as-you-go' plan with any indy carrier. [$929 MSRP + $42/month x 24 months].
2. Get the phone for $399 when you take the 'Standard Plan' two year contract. [$399 Down + $53/month x 24 months].
3. Get the phone for $195 when you take the 'Plus Plan' two year contract. [$199 Down + $67/month x 24 months].
4. Get the phone for free, $0 when you take the 'family size plan' two year contract. [$0 Down + $73/month x 24 months].

Assume each of these offers comes with all the usuals; unlimited calling and texting nationwide, voicemail, call waiting, caller ID, and 4GB of data use per month, more or less. There's also the costs we haven't take into account yet - the hidden costs. Whenever you buy a new phone there's always a $25 activation fee, on top of that there's also sales tax at some % rate depending on your state and country. 

Within the monthly plan there's also going to be extra costs too. There's usually an emergency services fee, and of course there's sales tax on everything every month too. The below table reflects the four available choices and options and price data:

As you can see, perhaps surprisingly, the most expensive option when you take everything into account is going to be buying the phone direct from Apple...

Let that sink in... is Apple charging more to their customers for the privilege of the in store experience? No, that's not it. It's the other way around, it's the phone companies, they are charging you a much higher rate for not buying a phone through them. Better put as, you forgo an intrinsic discount on your monthly phone service plan by not financing the phone through the telecom company. Seeing the data this way helps you make a more informed decision where you can actually plainly see the Opportunity Cost of choosing one option against the rest. It's clear, the best choice for value over the duration of the contract is going to be to pay the $399 (comes to $488) up front and go with the Standard Plan.

But $488 up front doesn't seem like a great deal, it's no small amount of money. Over-Complicated price schemes are not the only thing telecom companies are famous for though. Negotiations, seemingly an unavoidable circumstance that you will find yourself in, one day on hold, to argue with some sales rep about how much an extra mb of data usage was worth when you didn't realize you blew past your monthly allowance of Internets the last three months. Sometimes, if the stars align, you can actually get a better deal during the process by negotiating the terms of your contract at signup.

In the end, the final deal I could get by negotiating was $49 for the phone up front and $69 a month for two years. The table below shows how this custom arrangement compares to the Standard Plan offer.

You might be tempted to think, oh! The Standard plan is still cheaper over the span of two years by $25. Which is true, but not entirely. Again, because you need to consider the Opportunity Cost of the money you put down for the Phone. $488 is significant to the average person, so where does that $488 come from? Well, if you don't have the money, but you need to buy the phone regardless because you lost yours in a lake or something, then maybe you need to use a credit card to finance the $488. Now, the plan we ended up taking still cost $85 on the day of, so that difference of ($488 - $85 = ) $403 will cost you $177 in interest at 19.99% over two years. Which means even though the Standard Plan is $25 cheaper overall, that $25 is nowhere near enough to make up for the interest costs of borrowing the $403 extra up front.

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The Excel formula used to calculate interest is:

[The Payment  x  ((1 + Rate) ^ # of periods)]. Since we are analyzing from the perspective of using a credit card, you have to take the annualized interest rate 19.99%, divide it by 12 to get the monthly rate, and set the number of periods to 24 because interest is compounded monthly. For the sake of this demonstration we assume you make no payments for the two year period.

This means that in the custom deal, there is an implicit financing rate of 3.055% on a two year loan of $403, which is actually an excellent rate at which to borrow money. Lower than the cheapest mortgage rates in history, no one else is offering loans like that, especially for consumer electronics. You could even take that $403 you didn't have to fork over and go buy an investment with it, like a 5% GIC or bond. If you got 5% interest over 2 years, you would be looking at a total of $41.31 profit, subtract from that the $25 extra you pay overall for the custom plan and your phone plan purchase scheme now costs you $16.31 less by taking the $49 up front option. So you basically have to take the $49 custom plan at this point - with deals this good, how can anyone afford to Not get a new iPhone? This was the Black Friday Deal that was available.

If you're more of a visually inclined person, you might see the benefits of not forking over your cash up front and the time value of money in this line graph below. Notice how the dotted green line and dotted black line end up at the same place, but have very different starting points. That gap represents what you are giving up by choosing the Standard Plan, each month the difference becomes less and less until the very last two months, when the value option switches over to the Standard Plan being less cumulative cost to date.

Cumulative Cost of buying a new Phone over two years

It's the fact that the cross over happens only in the last two months that makes the custom Black Friday deal a better choice. For contrast on this point, consider what would  happen if you took it to the extreme and went with the zero $0 down option, as you can see, the value cross-over point occurs much sooner and then quickly becomes more expensive with time. 

Your situation may not be exactly like this scenario, but we have gone through and demonstrated how to take everything into account when making a decision about which phone plan to sign up for and how much you should pay up front for a new phone. You can use the exact same process as outlined above.

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