Pricing High Tech Products
Successful marketing companies know that pricing comes last when formulating the marketing mix of a product. The reason is very apparent: The price has to cover all the costs, including the product development and management costs, the distribution costs, and the communication costs in order to make a profit. Sometimes, a company may decide to price under cost for a given product on a given market for a given amount of time, but this is an exception, which cannot last forever.
Indeed, the impact of price is felt not only in sales volume and market share, but also financially as price determines a company's profitability. Indeed, according to the cost structure of a firm, a 1% price increase can improve profit margin by more than 50% [1]. For some companies in the computer business, for instance, where margins are very low, smart pricing is essential to survive [2]. Once you set the price for a product, it is extremely hard to change it [3], because customers never appreciate significant price fluctuations, as many "dot-com" firms have learned the hard way before collapsing. Once a price is made for a product, it is almost futile to increase it;on the other hand, a sudden price decrease may also have a negative impact on the product's perceived value leading to diminishing market share, volume, and profitability.
Price is also an important part of the marketing strategy, because a price strengthens a product's positioning in a market segment;that is, high-quality products usually call for high prices. Additionally, price is a basic element in the exchange between a company and its customers, even if it is not the only decision factor in the purchase of a high-tech product. On that matter, one has to consider that the prices of high-technology products are much higher than average prices of standard products: The price per kilogram of a satellite is 20,000 times higher than a kilogram of building material and 2,000 times higher than a kilogram of an automobile (see Figure 9.1).
$20,000/kg
$20,000/kg
$100/kg
$100/kg
$10/kg lOl
Construction Packaging Automotive Consumer Aviation Satellites electronics
Figure 9.1 Price comparisons of high-tech and standard products. (From: [4]. ©1991 French Ministry of Industry. Reprinted with permission.)
Consequently, price decisions are rarely made by just the marketing department [5] but at the top level of the company, at least for all the major products and innovations. According to a study performed in French hightech firms, the final price decision in 50% of the cases is made by the chief executives, in 40% of the cases by a sales manager, in 30% of the cases by a multifunctional committee, and only in 20% of the cases by a marketing director [6].
In a world where products and competitive positions change very quickly, price managers must know how to adapt continuously the listed price of the product [7]. The price makers must first determine the pricing mix among the various pricing models;then they must figure out the various price limits in order to get the general framework of the pricing policy. Next they must select the most relevant pricing method according to the type of products they want to market, as well as other drivers such as the existing range of products and the anticipated reactions of the various players in the market. Finally, they have to manage the price dynamically.
The first step of the pricing strategy starts with the analysis of the various sources of revenues that a product can potentially generate. For instance, a computer or a satellite can be sold directly, but they can also be leased or charged on a per use basis, like IBM's new business model of "computer on demand."
In the case of some product such as software or some technologies, the customer doesn't buy the source product but pays for a license to use it. This license can be charged by user, but also by site, and also by number and even by type of computer running the software. Its duration time may also vary. For instance, in 2002 Cadence, a leading firm marketing software for semiconductor design companies, introduced a "3-year" licensing scheme instead of the usual "99-year." Similarly, AutoDesk, a CAD software vendor, switched from a permanent license to a yearly subscription. Such a price policy change seeks to stimulate more repeated upgrades while diminishing the purchase price paid by the customers, though it has to be done repeatedly over the life time use of the software [8].
In the case of high-tech services such as the i-mode service offered by Japanese telecommunication operator NTT DoCoMo, for example, money can flow directly or from commissions. Direct revenues come from monthly subscriptions plus from the amount of e-mail and data downloaded from the 35 millions users;portal advertising and portal usage fees produce revenues, as well. Revenues also come indirectly from commissions on the m-commerce services available, as well as a commission (9% in 2003) on service revenues to content providers using the DoCoMo such as the hugely popular on-line games or sports information services. In 2003, DoCoMo's revenue mix was 13% from subscriptions, 10% from e-mail, 63% from Web access, and 13% from third-party content. The pricing strategy must balance the various pricing solutions for each of the sources of the revenue mix before setting the price for each of the components.
Price may be fixed but can also be variable in order to get a better balance between demand and supply, as is illustrated in Table 9.1. Variable, or dynamic, pricing has always been used for overstocks or commodity supplies. However, today, thanks to the Internet, it can also be more easily applied to high-tech consumer goods, such as electronics, as well as all categories of business goods through auctions or reverse auctions (see Section 9.2.4). Indeed, on the Internet prices can be changed on an hourly or daily basis at a very low cost compared to the weekly or monthly changes in the traditional brick-and-mortar channels. Furthermore, it is easier to analyze the nature of the sales, the consumer preferences and attitudes, or the demographic data of the visitors on a Web site. Finally, an increasing
|
Pricing Mode |
Nature of Revenues | |
|
One-off sale Permanent license Leasing |
Variable Per use Time-based license Subscription | |
|
Indirect |
Advertising (cost per thousand) |
Advertising per click Commission Collection charge |
number of price-sensitive customers are using price-comparison Web sites before purchasing on the Net, pushing for more competition on price [9]. The combination of those different factors is pushing companies to set a dynamic pricing policy, which takes into account and adapts in real time to any variation of the supply or demand in the market.
Another key element to consider is the nature of the product to be priced. Indeed, the product can be innovative;it can also be evolutionary and market driven, as an upgrade or an improvement of an existing prod-uct;it can also be just a copycat of another product already in the market (also known as a "me-too" product). To begin with, one has to do an honest assessment of the product's status. Some high-tech firms tends to consider a product as revolutionary (for them, but not for the market) when it is just market-driven and even sometimes a rough imitation, because the company is late getting it to the market.
The pricing decision is significantly affected by the status of the product. For instance, a frequent error made by many high-tech companies is to underprice revolutionary products in order quickly to build market share and because it is difficult to evaluate their value for customers. Similarly, underpricing an upgrade product, which actually offers substantial added value, can ignite cannibalization or a price war. On the other side, overpricing a me-too product, which falsely differentiates from the competition, will translate into market failure.
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