Taking The Call On Pricing In IT—Part II

DQC Bureau
New Update

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:


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.


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.



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.