Download Marketing_HighTech_3e_ch10

Chapter 10:
Pricing Considerations in High-Tech
Markets




What are the salient issues of pricing in hightech environments?
What are the 3Cs to consider prior to setting
prices?
Why is the pricing of after-sales service
crucial in high-tech markets?
When should specific pricing strategies be
used?
©2010 Pearson Education, Inc. publishing as Prentice Hall
Forces on High-Tech
Pricing Decisions
Rapid Pace
of Change
Short,
Volatile
Product Life
Cycles
Moore’s Law,
Pressure on
performance
& price
Investments
in R & D
Network
Externalities
High-Tech
Pricing
Environment
Backward
Unit-One
Costs
Compatibility,
Derivatives
Customer’s
Perceptions
of Cost/
Benefit
The Internet
Competition
Figure 10-1
©2010 Pearson Education, Inc. publishing as Prentice Hall

Need to recoup R&D investments in light of:
◦ Rapid pace of change
◦ Short, volatile product life cycles
◦ Pressure on Price/Performance Ratios: Moore’s Law
 Every 18 months, improvements in technology cut price
in half for same level of performance.
◦ Network externalities
 Value of product increases with usage
◦ Unit-one costs
 Cost of producing the first unit is very high
©2010 Pearson Education, Inc. publishing as Prentice Hall
◦ Customer perceptions of cost/benefit
 Anxiety
 Upgrade considerations
◦ Competition
 Threat of disruptive innovations and business models
◦ The Internet
 Cost transparency: customer leverage
 Reverse Auctions
◦ Backward compatibility, derivatives
©2010 Pearson Education, Inc. publishing as Prentice Hall
Competition
Costs
Customers
Figure 10-2
©2010 Pearson Education, Inc. publishing as Prentice Hall

Low-Price basis
◦ Sustainable, non-imitable cost advantage in
industry

Experience Curve (see figure on next slide)
◦ Savings from learning, volume, and specialization
 Employee efficiency
 Smooth production lines
 Decreased purchasing costs
◦ Pricing Strategies
 Begin with aggressive prices
 Lower price as curve takes effect
©2010 Pearson Education, Inc. publishing as Prentice Hall

Per-unit cost declines in production each time the
accumulated manufacturing volume doubles.
Figure 10-3
©2010 Pearson Education, Inc. publishing as Prentice Hall

Benchmark against which to evaluate prices.

Even new innovations have competitors
◦ Customer’s may not choose to adopt the new
technology
◦ Competitive substitutes

Cross-Price elasticity of demand
◦ % change in one product’s sales due to a % change
in a price of another product

Increase in complementary competitors may
increase prices
©2010 Pearson Education, Inc. publishing as Prentice Hall


Price ceiling is determined by customer’s
perception of value
Product Benefits
◦ Functional: attractive to technology enthusiasts
◦ Operational: product’s reliability, durability, ability to
increase efficiency
◦ Financial: credit terms, leasing options
◦ Personal: psychological satisfaction

Costs
◦ Monetary: price, transportation, installation
◦ Nonmonetary: risks of product failure, obsolescence,
factory downtime
©2010 Pearson Education, Inc. publishing as Prentice Hall

Reference Price: pricing standard used by
customer
◦ Prior experience or current competitor’s prices
◦ Current purchase environment

Total cost of ownership (life cycle costing)
◦ Important to company’s value proposition
◦ Monetary + nonmonetary costs over the life of the
product
©2010 Pearson Education, Inc. publishing as Prentice Hall
Understand exactly how the customer will
use the product.
1.
◦
◦
Each end use may have a different cost/benefit
analysis
Vertical markets: price accordingly
Focus on the benefits customers receive from
using the product
2.
◦
Customers buy benefits, not features
©2010 Pearson Education, Inc. publishing as Prentice Hall
Calculate customer costs
3.
◦
◦
Monetary and nonmonetary costs
Understand customer cost/benefit tradeoffs
©2010 Pearson Education, Inc. publishing as Prentice Hall
 Pricing
decisions:
◦ Are part of product design decisions
◦ Should be made early
◦ Tradeoff analysis and target costing are
useful tools
©2010 Pearson Education, Inc. publishing as Prentice Hall
 Different
segments value the
product differently
◦ Different customers yield differential
profitability
◦ Costs to serve customers varies
◦ Consumers are affected by perception of
fairness
©2010 Pearson Education, Inc. publishing as Prentice Hall

Firms should track profitability of
different customer accounts
◦ Some customers are not worth the
costs to serve them
©2010 Pearson Education, Inc. publishing as Prentice Hall
Price services based on segmentation
“Basic needs”
want standard service with basic inspections
and periodic maintenance
◦ fixed-price, well-defined, limited service
contract
©2010 Pearson Education, Inc. publishing as Prentice Hall
“Risk avoiders”
Want to avoid big bills but don’t care about
response time
◦ Combine fixed price + time and materials add-on
option
“Hand-holders”
Need high level of service and are willing to pay
◦
Full-coverage contract
©2010 Pearson Education, Inc. publishing as Prentice Hall

Rapid pace of price declines
◦ Moore’s Law, Competition
◦ At the extreme, technology is “free” and
companies literally give product away

How can businesses thrive when their
prices are falling?
◦ Innovative pricing
©2010 Pearson Education, Inc. publishing as Prentice Hall
1. Keep costs falling faster than prices
◦ Economy driven by unit-one costs
◦ Redefine value
2. Avoid commodity markets.
◦ Maintain a steady stream of innovation
◦ Differentiate offerings
◦ Mass customization
©2010 Pearson Education, Inc. publishing as Prentice Hall
3. Find new revenue streams
◦ New uses for existing products
◦ Offer whole product (end-to-end solution)
◦ Offer product bundles
◦ New, less price-sensitive, segments
◦ Offer product derivatives under a price lining
strategy
©2010 Pearson Education, Inc. publishing as Prentice Hall
4. Develop long-term relationships with
customers
◦
Requires high responsiveness to demand
◦
Focus on revenue from complementary
products and services

captive product pricing

advertising revenues
©2010 Pearson Education, Inc. publishing as Prentice Hall
5. Use smart (dynamic) pricing
◦
Gauge customer sensitivity to price
differentials
6. Have agility and speed in getting
products to market
©2010 Pearson Education, Inc. publishing as Prentice Hall
What degree of property rights
should the customer have?
Some options:
1. Outright sale vs. licensing agreements
2. Single vs. multiple users
3. Pay-per-use vs. subscription
©2010 Pearson Education, Inc. publishing as Prentice Hall

Outright sale of know-how assumes the NPV
of the technology can be estimated
◦ High levels of technological uncertainty  shortterm licenses are easier to valuate and execute
◦ Leads to more licensing rather than outright sale
©2010 Pearson Education, Inc. publishing as Prentice Hall

Single use licenses are often restricted on:
◦ Transferability
◦ Time period of use
◦ Number of users/physical products on which the
software may be used

Discounted site license for multiple users may
provide more value
©2010 Pearson Education, Inc. publishing as Prentice Hall

Network externalities favor subscription
pricing
◦ Generate more users to increase the value of the
network

Technological uncertainty favors subscription
pricing
◦ Risk averse customers prefer flat rates to avoid
uncertainty
◦ Online delivery model
©2010 Pearson Education, Inc. publishing as Prentice Hall

Temporary discounts
◦ Induce trial
◦ Overcome consumer resistance

Mitigate negative impacts on brand equity:
◦ Distinguish between prospective and existing
customers
◦ Consider the long-term impact of the promotions
©2010 Pearson Education, Inc. publishing as Prentice Hall

Opening Vignette: Apple iPhone

Technology Expert: RightNow Technology

Technology Solution: Orascom Telecom

End-of-Book Case: Skype, TiVo, ESRI,
Goomzee, SELCO- Solar Power in India
©2010 Pearson Education, Inc. publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
©2010 Pearson Education, Inc. publishing as Prentice Hall