chapter 10: pricing considerations in high-tech markets

Chapter 10: Pricing Considerations in High-

Tech Markets

©2010 Pearson Education, Inc. publishing as Prentice Hall

What are the salient issues of pricing in high-tech 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?


Figure 10-1

Forces on High-Tech Pricing Decisions


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


◦ 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


Competition

Customers Costs Figure 10-2


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


Per-unit cost declines in production each time the accumulated manufacturing volume doubles.

Figure 10-3


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


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


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


1. Understand exactly how the customer will use the product.

◦ Each end use may have a different cost/benefit analysis

◦ Vertical markets: price accordingly

2. Focus on the benefits customers receive from using the product

◦ Customers buy benefits, not features


3. Calculate customer costs◦ Monetary and nonmonetary costs◦ Understand customer cost/benefit trade-

offs


Pricing decisions:◦Are part of product design decisions◦Should be made early

◦Tradeoff analysis and target costing are useful tools


Different segments value the product differently

◦Different customers yield differential profitability

◦Costs to serve customers varies

◦Consumers are affected by perception of fairness


Firms should track profitability of different customer accounts

◦Some customers are not worth the costs to serve them


Price services based on segmentation

“Basic needs”

want standard service with basic inspections and periodic maintenance

◦ fixed-price, well-defined, limited service contract


“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


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


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


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


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


5.Use smart (dynamic) pricing

◦ Gauge customer sensitivity to price differentials

6.Have agility and speed in getting products to market


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


Outright sale of know-how assumes the NPV of the technology can be estimated

◦ High levels of technological uncertainty short-term licenses are easier to valuate and execute

◦ Leads to more licensing rather than outright sale


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


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


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


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


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