Unai Emery's men struggled to match the Saints and lost their first competitive match since August [vs. Chelsea] ending a run of 22 games without defeat.
Henrikh Mkhitaryan's brace was not enough to save the Gunners at St Mary's Stadium as Danny Ings' double and Charlie Austin's late winner denied them victory.
The 22-year-old, who was on parade for 70 minutes, noted his side's defensive lapses and has urged his teammates to pick themselves up ahead of Tuesday's League Cup game against archrivals Tottenham Hotspur.
"I guess we weren't concentrating throughout the 90 minutes. We had spells where we weren't defending well as a group," Iwobi told club website.
"It's something we have to dust ourselves down from and keep on going. We can't let our heads drop from this defeat, we just have to push on to the next match."
The defeat meant Arsenal are now three points adrift of the top four with 43 points from 17 matches with Southampton out of the relegation zone and up to 17th as Ralph Hasenhuttl sealed his first win in his first home match.
"Of course, they deserve some credit. They had a game plan and they stuck to it and did well against us," he continued.
"But it's disappointing from us and we have to keep going again.
Meanwhile, the Nigeria international who has scored just a goal in 14 league appearances this campaign expressed frustration in seeing their unbeaten run end on the south coast.
"Frustration that it's over. We had a lot of chances to win this game, I believe," he added.
"But we have to give ourselves a bit of credit that we were able to go on this unbeaten run and now we have to start over again."