Taking The Call On Pricing In IT—Part II

Price determination is a key responsibility in any organization and the
stakes at getting it right are very high for any entrepreneur. One needs to take
into account a host of factors before narrowing down on not just the method that
the company would follow in the long term for its pricing decision but also for
the actual short term-real time- price. It's all about being competitive in the
market today with an eye on the future

Pricing is a strategic tool in marketing. A company can choose to take one
among quite a few pretty radical approaches. Pricing strategies which are
directly connected with the ground realities should not be confused with the
overall pricing objectives that have already been covered in the previous
edition. A few of the possible strategies are detailed next:

SKIM-THE-CREAM STRATEGY

Also referred to as 'skimming pricing' by some, this involves pricing the
product quite close to the peak. Normally in such cases a newly introduced
product would be priced with an aim to recover investments as soon as possible.
It is implied that the product for which we choose such a strategy would not be
easily replicable. The vendor in turn must feel that the competition would take
substantial time to introduce a similar product, and also that there are no
comparable alternatives in the market. Moreover, the expected number of early
adopters would not be too high.

Anand C Mehta, Associate VP-Marketing, Digilink

The customers are attracted to a newly introduced product for its uniqueness
and not due to the value proposition it offers. One could take the example of an
ultra thin notebook computer or a non IT example of a new radically different
car design.In such cases, the product would sell initially just for the feel
good factor, apart from the value it offers. Companies can, in such cases, price
a product with an aim to maximize profits in the shortest possible time with
sales of just a few numbers.

This strategy can also help one arrive at the correct pricing in due course.
At first the price could be quite high, and when the product becomes widely
visible the pricing can be revised downward. This is done to maintain the
numbers being sold. This can help guard against a situation where in if the
company estimates the numbers incorrectly and hence initially prices the product
too low to recover costs it is then later forced to increase the price due as
the numbers are not providing the benefits of scale. A price rise is normally
not easily accepted by the customer. In such a regrettable scenario where the
price proves too low to cover the scale of operations it would be very difficult
to raise prices later.

Some times a company ends up pricing the product too high and yet errs in the
marketing communication. The message is very important. If the product is not
perceived to have properties that are liked by aspirational groups or is simply
seen as an expensive solution in such cases the entire strategy becomes a
casualty and could boomerang on future plans. The companies then later try to
reduce the price of the product. Yet they do not capture the eye of the value
conscious customers as they are then perceived a market failure and those eying
a VFM deal would not take the risk with a product that does not already sell in
sufficient numbers.

For many customers the joy of being among the first few to own a product
commands a price premium, they are customers who would actually choose not to
buy a product just because it is commonly available and priced within the reach
of the value conscious. This set of customers can still be tapped by a product
initially with the skimming strategy and with the number of buyers rising as
this set of buyer's loose interest the rest of the target audience can be
captured with a more VFM price. Premium PDA mobile phones are a good example of
the kind of products on which this logic applies. Though normally this can
involve initial sales to higher income groups and later to a more moderate
income group, the more appropriate term would be aspirational groups.

PENETRATION PRICING

As the name suggests this strategy is aimed at penetrating the market for a
high market share right at the start with a low price. It is implied that the
product is such that large volume manufacturing would result in substantial
savings on the cost of the product. And that the customer adoption rate is
dependent on the price of the product. That is, there is a significant price
elasticity quality about the product.

With the penetration strategy it is imperative for the competitor to react
very fast to cash in on the market wave that a new product would create.
Fortunately for those who adopt this strategy the competition is invariable
caught unaware and by the time it does manage to introduce an equivalent product
the company following penetration pricing would have majority share of the
market pie. This would, in turn, make it very hard for the competition to match
the pricing with the lower numbers available early on and hence would deter
other players from jumping in. Normally since most companies analyze the bottom
line and top line impact for each new product introduction the risk to the
competition for following in the wake of a price leader is too steep and they
give up right at the inception. Pretty much like the chicken and egg story.

FOLLOW THE MARKET

The key out here is being able to follow the changes by the market leader
fast enough. Some times by the time one reacts to a price revision the month has
passed by as also the business opportunity.

Memory RAM, USB pendrives, memory cards are examples of products where
vendors and channel partners, both are forced to follow this pricing strategy.
The price for these products fluctuate in the IT market place on a day to day
basis and keeping track is quite like following

the stock market with a lot of buy and sell decisions to make. In a market of
this type, where the medium and long term price change is

always “more for less” if one does not react fast enough the vendor and/or the
dealer could end up holding lots of stock valued lesser than the market price.
It's in a way all about fast stock rotation.

It not a simple decision to price the product at x percent below the brand y.
In fact it's a lot more complex, one has to consider the brand value that ones
own products carry and it is at times quite appropriate to price ones products
at a value higher than that of the market share leader. Some brands like Sony or
Apple (irrespective of the typically penetration pricing policy that they may
have for segments where they are technology leaders) for example carry a premium
over the generic IT and consumer products brands. They would need to protect
their interest in such a market space and price their products higher than the
market share leader.

Price the Bouquet

This approach involves having select items in the price book priced very
attractively almost like a magnet. The way it works is that the company selects
a few products that would be priced very aggressively-as one would say 'mouth
watering'. It would also make sure that these are the most visible and well
promoted products.

One needs to keep an eye on the competitors, our own targeted market share
and the overall potential demand for a product. Irrespective of which strategy
is selected one must have a flexible approach and be able to react fast to the
market needs. It's quite like a video game played over the web, where we can
only control the elements in our control but the other companies too are playing
the field too and each tries to hoodwink the others.