When should you upgrade your phone?

The annual release by Apple of yet another ‘must-have’ iPhone – or in this case possibly two depending on your definition of ‘new’ – is an occasion that conduces many to reflect on whether it’s time they upgraded their mobile device.

Contemplating a new phone purchase is a process that illustrates well how basic concepts of economics can be applied to everyday life. While game theory can be applied to iPhone pricing strategies by Australia’s three primary telecommunications companies, elementary level microeconomic cost-benefit analysis is really about as far as a purchasing decision goes.

Despite the decision of a new phone upgrade seeming analogous to any other buying decision, upon greater analysis it actually generally has a few additional variables. These will now be explored.

Consider the benefits

The most important consideration when thinking about upgrading to a new phone is that of the additional utility (benefit) you believe you will get from the purchase of a new mobile device. Determining whether this anticipated increase will just be short-term in nature or actually a long-term affair, in conjunction with giving thought to the different sources of utility enhancement (e.g. happiness, lustful satiation, expected productivity improvements from better battery life or processing speed, etc.) is of fundamental importance in facilitating the quantitative measurement of benefits.

Please note that consideration of which brand of phone, operating system and specific model to upgrade to is being explicitly excluded from this analysis; it all comes down to utility maximisation for an individual given their personal preferences.

Subtract the costs

Obviously, the primary cost of a phone upgrade is in the purchase price. However, appropriately determining an accurate value pertaining to this cost is generally far from straightforward. This is because the financing decision tends to distort the ‘headline cost’ of an upgrade. There are two main financing scenarios. Both of them should be considered net of any likely trade-in value from a current mobile device.

Firstly, a new phone can be bought outright. In this simple case the relevant cost is the purchase price. The second common option is to enter into a contract with a telecommunications company whereby handset repayments are included in a monthly plan. The complication here is three-fold: (1) only the handset repayment component of the monthly expense is relevant to an upgrade decision, yet this can often be hard to isolate because the carrier subsidises the phone’s value to enable greater network revenue; (2) the expected monthly payments need to be discounted back to the present at a discount rate that will vary from individual to individual; and, (3) there may be early contract termination fees if an individual is currently locked into a contract.

If an individual has a choice between different financing options, all of them should be incorporated into the cost-benefit analysis (with the lowest available costs used) to ensure that it remains comprehensive.

An additional cost to include is the value of the lost option to potentially upgrade sporadically at basically any given time. This is a discarded benefit because a new phone could be released just a few months down the track that would have a more profound positive effect on your utility and also because of the lost intangible benefit of being able to upgrade immediately if your phone was to be lost, stolen or damaged (at a lower opportunity cost given your existing phone is worth much less than any new one).

Finally, an easily omitted opportunity cost is the value of time spent throughout the process of upgrading. This would include time invested in the transaction itself, setting up a new phone and potentially selling an old one.

Make a decision

The actual decision itself is simple: do the benefits of upgrading outweigh the costs? However, placing a numerical weighting on various elements of any cost-benefit analysis is always subjective and somewhat imprecise.

After all of the aforementioned careful calculation, don’t forget that you may ultimately be limited by a budget constraint (available money). Unless you intend on paying by credit card of course. That would further complicate the above-explained financing scenarios.

So, with such an extensive cost-benefit analysis process, is it worth subjectively crunching numbers? For most, it’s probably not. However, it would certainly be of use to at least consider the aforementioned factors when making a decision. Lastly, don’t forget to sleep on it for optimal decision-making.

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