The second “P” of the marketing mix is price. There are several options to consider regarding price: 1) price matching, 2) price making, 3) introductory penetration pricing, and 4) a competitive upgrade price strategy.
(Note: This sample plan addresses pricing according to the needs of the specific company (this plan is a “de-classified” compilation of four actuals plans), so the pricing discussion is not comprehensive–just relative to the specific companies needs. Go to Pricing to find a complete discussion on all pricing objectives, strategies, structures, and levels.)
There are entire fields of study dealing with maximizing returns by optimizing price. However, as a vendor in two-tier distribution, we often don’t have complete control over the actual street price of a product. The resellers tend to price toward “natural price points.” These prices are the price breaks where typical consumers purchase software on impulse.
The major breaks are at $29 (the impulsive cash price), $49 (the impulsive checkbook price point) and $99 (the typical maximum amount that impulsive buyers can charge on their credit cards without consulting their spouse). Of course, there are exceptions and subsets, especially in the VAR market, where pricing is more aligned with potential market size, but for Acme to obtain the greatest saturation, we should follow the basic natural price points with our retail products.
Our current strategy is an example of price matching–by category. The Widget1 should street at $29, while Widget 2.0 has an SRP of $159 and should hit at $99. Our extra content provided on the CD and effective POP (point of purchase tent card) should help up-sell our advantages if other ACE editors attempt to undercut us and initiate price erosion.
As a side note, competitors may hit the shelf with a minor-price point of $79 but, unless their approach is specifically to gain market share, they would typically not be optimizing profits (they also may not sell much more at $79 versus the natural $99 price point; possibly leaving money on the table).
- Price Example: At DCA, the product CrossTalk was originally priced at $29 over the market leader. Management’s reasoning was that it was a better product, it won more awards, and the company felt they would lose credibility by being associated with a consumer price point. However, the pricing was incorrect. CrossTalk was not the price maker since it was not the market leader, instead it was a price taker. In addition, the packaging did not effectively demonstrate enough value for the $29 difference.
- When the product used a price matching strategy, instead of the price maker approach it demonstrated elasticity of demand. The increase in volume, profitability, and revenue increased by 7% overall which compensated for the $29 reduction.
We should similarly test the price, measure the results and, if the difference is noticeable, then consider a price-matching strategy.
On the other side, Widget2 will follow a different model since it will, at $495, seldom be an impulsive purchase (at least not in our neighborhood). If we are perceived as the first player in an entirely new category we could be a “price maker” and could set our own price to maximize profits based on the tested elasticity of demand. However, if we are unable to make a strong differentiation between ourselves and similarly perceived programs like ACE Director we would be a price taker and should snap into the existing price structure for that category (i.e., if Director sells for $495 we should hit the street at or below the same price).
It is recommended that we hit the shelves with an initial price matching strategy and then vary the price (with reseller and end-user promotions)–either up or down accordingly to maximize profitability. We may not need to dilute the price of this product for market share since we will have used the lower end Widget1 to achieve that objective.
We have discussed price matching and price making–we should also use introductory penetration pricing during the launch. This will help our sell-ins, especially with our higher-end Widget 2.2 product. An example of reducing our pricing temporarily would be to include a “buy 1 get one free” opening order–this will allow the stores to pocket most of the difference and increase their willingness to test; it will also help us get bigger initial buy-ins.
- As an additional example, Hayes ran a pricing promotion with their SmartCom software where they offered their $149 SRP product for $49 SRP/Street. They didn’t advertise the length of the campaign. I have found that these type of price reductions typically don’t pull longer than 90 days before the public gets wise and realizes that the special pricing is now the normal price and the volume dilutes; which was exactly the case with the Hayes Software promotion at which point they started a different promotion. As was their goal, their pricing strategy helped them achieve massive channel penetration.
Another pricing model deals with competitive pricing. As we are developing a new market category we should use this approach aggressively to hold onto existing users and cater to our competitor’s user’s dissatisfaction or curiosity. Resellers aren’t typically going to carry upgrade copies of our software unless we’re a Microstuff, Lotus or high margin. However, we can still involve the channel in our upgrade policy by stickering the box with a $20 competitive mail-in rebate coupon “available in the box.” Delrina, with Winfax, has been the most successful with this approach. This will help increase sales based on a perception of a competitive discount, yet it shouldn’t cost much more since, typically, only 10% of mail-in rebates are redeemed–saving Acme money.
Aside from coupon rebates, competitive upgrades should also be fulfilled directly to hold margin. At $99 Acme can afford to sell a competitive upgrade for $49 and still make the same as a package sold with 50 points in the channel. Acme can use the lower-end product as it’s a primary competitive upgrade path. The $495 package should still have a competitive upgrade policy but it doesn’t have to be as aggressive. This price can be decided later at a time closer to when the product ships.
Additional Pricing Issues
Three other areas that involve special pricing deal with 1) college student pricing, 2) upgrade pricing and 3) reseller NFR pricing.
- College students should typically receive about a 1/2 off price deduction with a $99 maximum ceiling to purchase the software for their personal use–this is primarily used as a seeding campaign so they can influence the eventual purchase later when they enter the workforce. This package should have a different SKU with special labeling to avoid problems within distribution.
- Upgrade pricing should not be finalized at this time since it may vary after reviewing competitor’s upgrade programs– although this is certainly not the time to lose out on a faithful customer who switched because a competitive upgrade was less expensive than Acme’s own upgrade price.
- Reseller NFR’s are treated entirely different. Since resellers are an extension of our own sales force they should be treated accordingly. We should not be making our margin off them but off their customers. Resellers should be allowed to purchase NFR copies for personal or store use at our cost of goods plus postage. Under certain circumstances, i.e., during training tours, they may be sold copies at a subsidized lower-than-cost rate (i.e., $10) or for free if they make an issue out of it. This allows for an impending event close.
Acme should charge a nominal charge, instead of giving NFR’s away for free since it has been shown repeatedly that the chances of a reseller actually installing the copy is higher if he first pays a token fee. In this case the adage, “What we obtain too cheaply, we esteem too lightly,” holds true.
Street Price Versus SRP
The final issue regarding price refers to our, “telling price.” This is the price we tell the public and the press. In a recent review, the price for Home ACE Builder was listed as $99.95, while the price for Acme’s product was shown at $159, even though it also sold on the street for $99.95. The trick: Home ACE Builder, intentionally avoiding an SRP, and only published the “anticipated street price.”
Even if two products are priced identical on the store shelf, a prospect may see the two products reviewed and decide, as much as he’d like to have the best, for the $50 difference (that he read about) he will “settle” for the lower-priced product–of course this primarily refers to retail since there is less price sensitivity (within the “petty cash” range) for higher-end products. Nowadays, the SRP is primarily used by the company to set the distributor discount (50-55% off SRP) or used by the VAR as a “price savings buildup” so he can give then a 10% corporate discount off SRP and still make money. As such, the SRP should not be published to the press.
VARs Must Sell Value – Not Price
One possible concern of modifying our price (visible in Retail) right now is that some of the VAR’s may get upset, which is very important considering the competitor’s activity. However, because we value our VARs, we must teach them how to sell by adding value, instead of reducing the price or they will never make it in a “CompUSA” commodity world. In reality, any reseller that relies on price, instead of attention, service, integration, training, and add-ons are not, by definition, a VAR—and he’s never going to make the kind of money he is capable of without moving in that direction. For our product line, the retail copies need to be looked at as seed copies that help sell full-scale upgrades with the type of integration and support only available through VARs.
Regardless, if we reduce our price it will be unilateral and the VAR also gets the discount. If the VAR chooses to hold his original price, he then makes more than he would have otherwise. The price reduction shouldn’t be any more of an issue than usual since we frequently run discount direct mail offers. Although with direct mail we typically only get a 1-2% response which means there is a 98-99% advertising halo effect which increases overall traffic for retail and the VARs.
A solution may be to hold the price reduction until after the new packaging and consider it part of the initial “new box” promotion. This would also give us enough time to cement the new VAR program and start launching some of the proposals contained within this plan.