The Price Advantage by Baker Walter L. & Marn Michael V. & Zawada Craig C

Author:Baker, Walter L. & Marn, Michael V. & Zawada, Craig C.
Language: eng
Format: epub
Publisher: Wiley
Published: 2010-07-11T16:00:00+00:00

The second mistake is reducing the product price soon after launch out of fear the company will not achieve enough market penetration. This can be particularly deadly when an initially high price (targeted at a subset of customers) is set for launch, but high levels of production produce an abundance of inventory and inadvertent pressure to reduce price to clear it.

A networking equipment manufacturer that provided both network hardware and related application software astutely observed the gradual commoditization of the hardware and the shift to software as the source of differential value to customers. Industry practice had for decades been to concentrate virtually all of the price in the hardware, and provide software for free or at very low prices. As hardware became more of a commodity with regular price declines of 15 to 20 percent, it became clear that software was where value pricing and returns were possible. So the company decided to change the game. It priced hardware and software separately and significantly increased and differentiated the software pricing. These changes achieved a 24 percent premium on its original system pricing, reinforced the value of the company’s intellectual property and innovation, and helped hedge against the price erosion for networking hardware. It also enabled the company to differentiate pricing for the various software packages and scale it based on companies’ needs.

Exhibit 10-3 Semiconductor Company: Introduction of New Market Model

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