Term Paper - Pricing

Pricing of a

Revolutionary New

Product

Submitted by:

Group 1

Aarti Utreja (2008001)

Diksha Agrawal (2008013)

Mugdha Lakhakar (2008024)

Parikshit Bhinde (2008028)

Rupika Jain (2008045)

Table of Contents Pricing of a Revolutionary New Product .............................................................. 1

Different types of Products: Revolutionary, Evolutionary & Me-Too ................. 3

Revolutionary: ....................................................................................................... 3

Evolutionary: ......................................................................................................... 3

Me-too: .................................................................................................................. 3

What is a revolutionary product? ........................................................................ 4

The Product Life Cycle of a Revolutionary Product ............................................. 5

Approach1: Employ an innovation framework: Revolutionary, Evolutionary,

Me-Too .................................................................................................................. 5

Approach 2: Value All the Stakeholder’s Benefits .............................................. 6

Approach 3: Analyze the Entire Usage Chain .................................................... 6

Price-Value Mapping ........................................................................................... 6

Estimation of value and pricing ........................................................................... 7

Select Sample – not at random ............................................................................ 7

Develop Prototype and Educate ........................................................................... 7

Determine Value Gaps ......................................................................................... 7

Measure Value Delivered ..................................................................................... 8

Value Communication .......................................................................................... 8

Trial promotions ................................................................................................... 9

Direct Sales ..........................................................................................................10

Marketing Innovations through Distribution Channels .................................10

Pricing Strategy for Sustaining a Revolutionary Product over its Life Cycle ... 10

Growth Stage .......................................................................................................10

Pricing the Differentiated Product .................................................................11

Pricing the Low cost product ..........................................................................12

Price Reduction in Growth .............................................................................12

Maturity Stage .....................................................................................................12

Unbundling of related products .....................................................................13

Improved demand estimation .........................................................................13

Improved control and utilization of costs .....................................................13

Expansion of the product line ........................................................................13

Re-evaluation of distribution channels .........................................................14

Decline stage .......................................................................................................14

Pricing strategy of a successful revolutionary product: ................................... 15

1. Apple iPhone .................................................................................................15

2. The Sony Walkman Line ..............................................................................17

Pricing strategy of a failed revolutionary product: .......................................... 19

1. Apple Newton ...............................................................................................19

2. REVA: a successful failure ...........................................................................20

Different types of Products: Revolutionary, Evolutionary &

Me-Too

A critical step—and often the first stumbling block—in releasing a new product

is to understand its true nature. Whatever its price category, it hits the market in

one of three positions.

Revolutionary: are the genesis of rapid triumph of the new ideas and breaking

open of the old concepts. A product is so new that it creates its own market.

Quantifying and explaining such a product's benefits to an untested market takes skill.

Evolutionary: is the result of a process of small frequent changes to improve and

adapt to environment. Upgrades and enhancements to existing products are

evolutionary in nature. If the new product provides too many new benefits at too low

a price, a price war can ensue.

Me-too: Painstaking cost analysis and a clear set of target customers are needed to

avoid catastrophe with me-too products, which bring a company into line with the rest

of the market without adding new benefits. For example the numerous MP3 players in

the market after the launch of the iPod.

Too often, companies overplay the benefits of their new products, touting as revolutionary

what is at best evolutionary and rarely acknowledging that they are really playing catch-up.

But it is important to make an honest internal assessment of a product's position, since

different pricing strategies are appropriate for each of the three possibilities.

Revolutionary Evolutionary

New –to-the-world performance

features

Huge advance in performance

A possible cost reduction

Improvement in existing product

Derivative of existing product

platform

Exploits existing forms or

technologies

High risk Lower risk

Infrequently occurring More frequent

Costly to do Less costly

Targeted to new or existing markets Targeting to existing or adjacent

markets

Marketing’s key responsibilities

Envision the market

Create demand

Educate the market

Listen to the existing market

Accommodate current demand

Let us talk about an example that will make this differentiation clear.

Evolutionary products are ones that simply take a design to the next logical step, for example

the Pentium IV was an evolutionary design that enhanced chip performance but it did not

really change how people use computers. Revolutionary designs are those that fundamentally

change how something is done, a good example of a revolutionary design is the photocopy

machine, it fundamentally changed how information was disseminated and possibly led to the

prevalence of literacy.

What is a revolutionary product?

A revolutionary product brings one or more of the following attributes to the market:

An entirely new set of performance features

Improvements I performance features that are many times greater than those

found in the market

A sizable reduction in cost for the same features offered by other products

Revolutionary products often come from upstart players or companies outside the industry,

while mainstream operators follow a risk-averse path of concentrating on their current

business.

These revolutionary products change the basis of competition in their industries. Some of the

possible examples could be:

Antibiotics

Photocopy machine

Transistor

GPS devices

iPod

Heart pacemaker

Marketing‟s involvement with revolutionary products should be more general than specific in

the early phases of their development. Researchers like to ask customers what they want, but

because most people‟s frame of reference is only the world of existing products, they

inevitably describe what they want in terms f what they already have. Thus only few can

imagine something entirely new – that is, something beyond their experience and

understanding of technical possibilities.

Many companies should also change the way they price new products. Although most

markets exert intense pressure to keep prices low, a wide range of new offerings could

actually command higher ones. Companies are particularly prone to under pricing

revolutionary products, since it is all too easy to underestimate the value to customers of new

features and attributes.

The Product Life Cycle of a Revolutionary Product

Pricing decisions for innovations is more complex than for new products in an existing

category. Not only are customers unaware of the benefits of the innovation, but no

benchmarks have been set for determining the product value.

It goes without doubt that there is significant opportunity to capture value in the pricing of

new products. The key to pricing a new product is determining and monetizing the

differential value it brings to customers. Once the value of innovations has been established,

simple price-value maps can be used to determine an appropriate price range.

There are 3 complementary approaches to determine a product‟s differential value.

1. Classifying the product‟s level of information in a framework

2. Valuing the benefits for all stakeholders

3. Analysing the entire usage chain around the product

Approach1: Employ an innovation framework: Revolutionary,

Evolutionary, Me-Too

A simple method of positioning is to classify the product‟s level of innovation as one of the

following:

Revolutionary – A revolutionary product brings something completely new and

exceptional to the market and does not have a direct competitor.

Evolutionary – An evolutionary product brings a meaningful, customer relevant

product enhancement to an existing product category. These are usually

improvements over previous iterations.

Follower or me-too – A me-too product looks and smells almost exactly like an

existing product in the market. They bring little new or additional value.

Revolutionary Products – These products are exceptional, by nature, and their prices should

signal this. The introductory price should be a number of times the current product‟s price.

High prices serve many purposes:

1. They provide an „anchor‟ for perceptions of top value; starting with high prices and

then reducing them gradually is seen by consumers as a sign of premium quality.

2. They fund the market development activities needed to establish the product.

3. They act as a filter so only committed „early adopters‟ buy it; that is, those buyers

who are likely to be champions and not frustrated with initial bugs.

The acceptance of a revolutionary product is generally not strongly dependent on the price,

but more so on convincing customers of its value and the need to switch to it.

Approach 2: Value All the Stakeholder’s Benefits

This exercise is particularly useful when the innovation adds value to those who are not

commonly the direct customers and who need to be approached differently. It is set up as a

brainstorming session that engages participants from cross functions (i.e every imaginable

stakeholder) to ensure coverage of all aspects of value.

Once identified, all differential benefits are rigorously examined by the participants. The

value to the customer can be multi-dimensional, deriving from the product, associated

services and the company brand name.

Benefits are quantified, even if they are estimates. Purchasers generally accept prices that are

half the quantified differentiated value. Indirect benefits should also be quantified .

Approach 3: Analyze the Entire Usage Chain

A method to examine and enhance value of a product is to consider the full life chain around

its use. This can help escape commoditization. The exercise involves outlining all the

relevant activities surrounding the use of the product and then searching value at each stage.

Price-Value Mapping

Price-value maps are fundamental tools that allow:

1. Value to be translated into market prices and to compare competing alternatives

2. Companies to verify assumptions on market dynamics and customer value

perceptions.

They are simply plots of all products with their price against customer perceived value. When

market shares are stable, all products lie on the equilibrium line. If a product is below the

line, it provides additional value for the price and gains share, while the reverse is true for

products above the line.

A price for the innovation is simply given by plotting its comparative value on the P-V maps

equilibrium line.

Estimation of value and pricing

Pricing a new product is one of the most challenging marketing decisions to be made. If the

price is too high, it can scare customers away; if it‟s too low, you can leave substantial

amounts of money on the table and raise doubts about the quality of your offering.

It‟s even more difficult when you are launching an innovative product that customers are not

familiar with, as opposed to a new product in an existing category, since the benchmarks for

determining value are not evident.

Not only do customers not know the benefit of the innovation, but also no buying process has

been established to provide insight into the purchasing decision.

The Advantage Group has developed a proprietary five-step process for estimating value and

pricing innovations. The process has been christened, “Value Navigator”. What follows is a

brief description of the five steps of the process:

Select Sample – not at random

Deciding whom to include in your sample is an important first step. Unlike products

launched into existing categories, innovations will succeed or fail based on the views

of the first 3-5% of purchasers who try the product. These people tend to be leading-

edge thinkers, or innovators who need/want the benefits most. Therefore, it is much

more important that you understand their views on the value of the product and their

price sensitivity, since they are going to influence the opinions of the rest of the

market. This is referred to as the “Diffusion Effect.”

Develop Prototype and Educate

You must provide the customer with in-depth product knowledge to ensure that he or

she can realistically assess the benefits.

Determine Value Gaps

Ask customers to rate the value of the attributes of your innovation. Once you have

completed that exercise, ask them to rate their level of satisfaction with the products/

services they currently use. Innovations often replace several different products at one

time. Understanding what those products are, their costs, and how customers use them

is extremely important; it will help you establish the “reference points” the customer

uses for assessing the value of your innovation.

Measure Value Delivered

When clients make a buying decision, they purchase three things: size, speed,

certainty. Therefore, you must measure all three from the customer‟s perspective to

ensure that you price your product properly. Of the three, certainty is the most

important.

Value Communication

Presenting a price to the market requires both astute communication with it and patience as

shown in Figure 1. It can be especially hard to explain the value and benefits of revolutionary

products to often-sceptical buyers, but whatever conditions a new product may face, a faulty

pricing strategy shouldn't be allowed to undermine its value message.

A product's fortunes during the first six months to a year after it hits the market have a critical

influence on its value position. Especially during this period, companies must keep firm

control of their pricing operations, all the way down to individual transactions. For instance,

discounting, which could be routine for continuing product lines, might sabotage a new

product's reference price.

If managers must push a product quickly, however, they can do so without sacrificing its

reference price or the market's perception of its value.

The value of new products typically increases directly proportionally to whether the product

is me-too, evolutionary, or revolutionary. This in turn, provides guidance relative to the

extent that penetration or premium pricing strategy should be pursued. The newer or more

revolutionary is the product, with the fewer the comparables, the greater is the opportunity to

seek premium pricing. On the other hand, for products that may simply be new to your own

Perceived Value

Low High

High

Low

Price- Value

Equivalence

Line

Evolutionary

Revolutionary

Penetration

Pricing

Premium

Pricing

Me- Too

Perceived Value

Low High

High

Low

Price- Value

Equivalence

Line

Evolutionary

Revolutionary

Penetration

Pricing

Premium

Pricing

Me- Too

company, but not to the market, the opportunity for premium pricing is limited. Penetration

pricing is more realistic, but, given existing competitors and their competitive responses,

realistically, pricing should occur closer to the price/value equivalency line. Opportunities for

penetration pricing occur again at the lower end, with low price/value where the competitive

threat presented may not warrant strong competitor response.

Product lifecycle and Premium/ Penetration Pricing

Does marketing a revolutionary product need to be different from others? Yes,

communication value through marketing techniques must be tailored to the type of innovation

that goes in the product. Because of high uncertainty with marketing of revolutionary

products, the margin of error is very small, hence it is important for a firm to communicate

value and benefits that a product inculcates and build an effective, efficient distribution

channel for the same.

Trial promotions

A common technique to push a revolutionary product in the market is to offer

consumers free samples or to give the product to small groups of customers with a

high profile or significant market influence. Another is to offer it to customers for a

free-trial period. The benefit of both these approaches is: to speed up the market

penetration of the product without cutting the reference price.

Not all revolutionary products can be economically promoted by price-induced

sampling, however. Many innovations are durable goods for which price-cutting to

induce trial is rarely cost-effective. Also many revolutionary products, both durable

and non durables, will not immediately reveal their value when sampled once.

Price induced sampling does not effectively establish the product‟s worth in the

buyer‟s minds. Instead, market development requires more direct education of buyers

before they make their first purchase

Direct Sales

For innovations that involve large dollar expenditure per purchase, education usually

involves a direct sales force trained to evaluate buyers‟ needs and to explain how the

product will satisfy them. For example, in the early 1990s, enterprise software was

considered a risky purchase due to the high degree of uncertainty about the ability to

integrate the software into a company‟s IT architecture. But rather than growing sales

by pricing their product cheaply, SAP, a market leader in enterprise software,

mitigated the uncertainty by providing new customers access to successful

installations and by partnering with integration firms to ensure successful

implementations. This resulted in a nine fold increase in SAP‟s sales in the mid-90s.

Marketing Innovations through Distribution Channels

For revolutionary products sold through distribution channels, the innovator must

convince the distributor to vigorously promote the product. One way to do this is by

offering distributors a low wholesale price, leaving them with high margins, thereby

giving them an incentive to promote the product with buyer education and service.

However, when distribution channels are more competitive, that extra margin is often

passed on in price discounts, thereby eliminating the promotional incentive. To avoid

this situation, revolutionists may keep the margins at normal levels but pay incentive

fees for stocking new products, coop advertising, in-store displays, premium shelf

space, and on-site service and demonstration.

Pricing Strategy for Sustaining a Revolutionary Product over

its Life Cycle

Growth Stage

Once the revolutionary product is introduced into the market and has gained foothold,

the pricing strategy of the product needs a change. Since, the product‟s value is

known and can be judged from the previous experience, the repeat buyers are no

longer uncertain about the product. Additional segment of buyers is added to the

customer base of the product as the first time buyers reply on the reports from the

Innovators. Thus in the growth stage, the buyers are no longer concerned about the

product‟s utility but instead are more concerned about the costs. They are also more

vigilant about the products supplied by other brands. Even though a revolutionary

product is well protected, new entrants come into the market and copy the

revolutionary product thus providing the customers with multiple options to choose

from.

As the competition begins to increase, it becomes more necessary for the original

innovator to assume competitive position and must decide where it will place its

marketing strategy on the range between a pure differentiated product strategy and a

pure cost leadership strategy.

In a differentiated product strategy, a company focuses its marketing efforts on

developing unique attributes for its product. As the competition grows, the uniqueness

of its product creates a value effect that satisfies the consumer‟s price sensitivity. This

enables the firm to price profitably despite increasing number of competitors. One

such example is Apple which created a reputation for itself during the early stage of

computers by providing user-friendly interface, proprietary operating system, and

distinct product designs.

A particular example is Apple IPod. Apple Computers Inc. launched IPod in the

December of 2001 at the price of $399. The product became an instant with 125000

units sold by December 2002. The iPod created a new generation of Apple fanatics

that simply couldn‟t get enough of the iPod and all of the iPod attachments that have

since developed.

By the year 2004, IPod reached its Growth Stage as more and more companies started

imitating the IPod and came up with different versions of the IPod. Hence, Apple

adopted a Differentiated Product Strategy. To sustain the competition, Apple began

introducing innovations and product line expansions. It made upgrades to the original

model as well as came up with different new versions under the IPod brand. The key

competitors were Creative Technologies and Sony.

In a cost leadership strategy, the firm directs its marketing efforts towards becoming

a low-cost producer. In growth, the firm must focus on producing a product that it can

produce at minimum cost. The firm expects that its lower costs will enable it to profit

despite competitive pricing.

A classic example for this strategy is Dell. Dell incorporated the practice of selling

direct to the customers by assembling the PCs for them with the best parts. This

eliminated the middlemen like the distributors and the retailers thus reducing the cost

to the customer. With the advent of internet, Dell launched its website and continued

direct selling through it. The main competitors for Dell are HP and Lenovo. But Dell

is the only one practicing Cost Leadership Strategy and has been a market leader

owing to this strategy.

Pricing the Differentiated Product

Buyers find attributes of a revolutionary product uniquely valuable. Skim pricing can

be used for the segment of customers who value the product most highly.

But when the product targets multiple segments, neutral prices or penetration pricing

earn more profits for the company from the sales volumes that the product attracts.

Penetration pricing is commonly used for industrial products where a company may

develop a superior piece of equipment, computer SW or service, but price it no more

than the competition. This pricing is followed in order to capture a large market share

before competitors can imitate the product. Thus, this strategy eliminates the

competition.

Pricing the Low cost product

Industry wide cost leadership can be attained by using penetration pricing.

For example, when the source of the firm‟s anticipated cost advantage depends on

selling a large volume, it may set low penetration prices during the growth to gain a

dominant market share. Later, it maintains those penetration prices as a competitive

deterrent, while still earning profits due to its superior cost position.

One factor required for penetration pricing to be successful is that the target market

should be price sensitive. Otherwise, this pricing strategy will not have any impact on

the market share of the company.

If the target market is not price sensitive, then neutral pricing should be implemented

in order to attain cost leadership. Factors which can lead to cost leadership are cost-

efficient technological leadership, advertising, and extensive distribution.

Price Reduction in Growth

In the growth stage, more and more new entrants come into the market and the

competition increases. The product gains wide acceptance from the customers.

Customers find the product more reliable and hence, look for lesser price of the

product rather than the features it provides. Hence, regardless of the product strategy,

the best price for the product is normally less than the price set for introducing the

product in the market. The original innovator has a competitive advantage over others

as it understands the product better thus enabling them to better evaluate the

alternatives.

Reducing price of the product will have the advantage speeding up of the production

adoption process and enable the firm to earn profit due to cost economies from the

increased scale of output.

Maturity Stage

During this phase, most buyers are repeat purchasers who are familiar with the

product.

Customers get to compare competitive brands much better and hence price sensitivity

is the maximum in this phase of the life cycle of the product. The pressure to lower

the prices increases on the brands. To stay profitable even in such situation, a

company must achieve a defensible, competitive position through cost leadership or

differentiation, and exploiting it effectively.

Some of the options to maintain

margins are

Unbundling of related

products

Car rentals, hotels and airlines use

unbundling of related product as a

strategy to show lower costs and

then when the customer pays they

come up with the hidden add-ons

like: damage insurance, minibar,

extra luggage, with each item

adding to the total cost.

Unbundled pricing should be done with customers in mind, delivering them value and

in that process increasing profit margin for each customer.

Unbundling can be done either across product dimensions, time or both. That gives

four possible pricing scenarios:

Monolithic Pricing: Customers pay once and get all product features whether or not

they need all the features and for all the time.

Subscription Pricing: This is pay-as-you-go scheme. Customers pay periodically and

get all the features.

Add-Ons: Customers pay once and pay only for the basic version but can pay

additional price to buy Add-On features.

Usage Based Pricing: Customers pay only for the features they want and only for the

time period they need the features.

Improved demand estimation

Major pricing strategies on the regulation of industry often hinge on the estimation of

what will happen to demand.

Improved control and utilization of costs

Expansion of the product line

As explained above in the case of Apple IPod, expansion of product line helps to have

control and to regulate the market. This also helps in avoiding the competition to a

certain extent as this ensures that the innovative company is always ahead of its

competition.

One other example of product line expansion are the Surf series of Surf, Surf Excel,

Surf Excel Blue.

Also in the Oligopolistic cola market, the main brands are Coke and Pepsi competing

against each other. In order to maintain the market share, both the brands come up

with different products which usually have a short life. Pepsi introduced “Diet Pepsi”

in 1964. In competition with Diet Pepsi, Coke introduced “Diet Coke”. Coke

introduced “Vanilla Coke” in April 2002. In competition to this, Pepsi introduced the

“Pepsi Blue” in mid-2002 in USA.

Re-evaluation of distribution channels

Decline stage

Reduced buyer demand and excess capacity is a sign of declining phase. In such a

scenario, a firm should check whether its costs are largely variable and if the capital

can be reallocated to another market. If easily possible, then the firm should do so and

reduce the price of the product by a small margin.

In case the costs are more of the fixed costs, then the cost increases due to

underutilization of capacity due to fall in demand. On the other hand, the price

competition increases as each competing firm tries to increase capacity utilization in

order to reduce costs. In such a case, the options available with the firm are:

Retrenchment: A retrenchment strategy involves either partial or complete

capitulation of some market segments to refocus resources on others where the firm

has a stronger position. The firm deliberately forgoes market share but positions itself

to be more profitable with the share it retains.

An example for this would be Kodak closing down its photography business and

laying off people in order to invest more heavily in the digital camera market. Kodak

stood at the top position for market share in 2005.

Harvesting: A harvesting strategy means phased withdrawal from an industry. A

harvesting firm prices it‟s product to maximize its income rather than defending its

market share.

Polaroid was forced into rapid harvesting strategy which led to closing down the

company in 2002 as it failed to respond to the upcoming digital technology.

Consolidation: A consolidation strategy is an attempt to gain a stronger position in

a declining industry. This strategy can be followed by a firm which is financially

strong. A strong financial position would enable the firm to stand the competition till

all the competitors phase out. Thus the firm becomes profitable as it gains a large

market share in a restricted and less competitive industry.

Nikon and Cannon followed the Consolidation strategy focusing on the high end

market for photography. They also entered the digital market segment. But they did

not close down the photography business.

Pricing strategy of a successful revolutionary product:

1. Apple iPhone

The Apple iPhone is an elegantly designed information communicator forged from steel and

silicon that runs pioneering software under Apple‟s OS X in a Unix Kernel. The iPhone

combines smart phone capabilities with a simple to use graphical interface projected on a

large „multi-touch‟ display. Apple has managed to create a Macintosh computer with mobile

phone capabilities, bundled within an Internet enabled PDA and an iPod body. The iPhone‟s

functionality is accessed through its 3.5-inch touch screen display and one “home” button.

Using only finger commands, a user can navigate seamlessly through iPhone‟s features,

conjuring up a keyboard when needed.

Apple’s iPhone Strategy

Price

The initial price of the iPhone was set at:

Model Price

4 Gb Model $499

8 Gb Model $599

Introduced in June 2007 at a top price of $599 in the United States, the iPhone was one of the

most anticipated electronic devices of the decade. Despite its high price, consumers across

the country stood in long lines to buy the iPhone on the first day of sales. Just two months

later, Apple discontinued the less-expensive $499 model and cut the price of the premium

version from $599 to $399.

A study conducted by Rubicon (2008) on iPhone users indicates that 50% of the surveyed

users are age 30 or younger. Most of the users described themselves as technologically

sophisticated. In general, iPhone users were over represented in the occupations that are

usually early adopters of technology: professional and scientific users, arts and entertainment,

and the information industry.

(Source : Rubicon consulting, 2008)

Moreover, the iPhone user base consists mainly of young early adopters: about 75% of whom

are previous Apple customers. Now, the challenge for Apple is to get their product beyond

the youthful technophiles and into the hands of mainstream users in order to maintain

sustained growth. While the early adopters are a great group for launching a product, without

mainstream use, the early success would not be lasting. This is why Apple has decided to

use different pricing strategies such as the skimming and versioning.

The skimming price strategy is a high price strategy which provides a healthy margin but

risks a depressed sales volume. Since high prices also attract piracy, protection costs against

piracy basically eat up margins. In the case of Apple, the buyers are not attracted by pirated

versions of products because of the image of the brand linked to the snobbism of the

“members of the Apple family”.

To gain market share, a seller cannot solemnly rely on skimming strategies but must also use

other pricing tactics such as pricing discrimination, which has been the case of Apple.

Apple‟s price cut is an example of a strategy known as “temporal price discrimination”

where it charges people different prices depending on their desire or ability to pay.

Companies such as Apple may practice this strategy for two reasons. First, they gain wide

profit margins from those willing to pay a premium price. Second, they benefit from high

volume by building a wider customer base for the product later. It‟s important to note that

price discrimination can also be structured across geographies, seasons and by adding or

eliminating features. As for the “temporal price discrimination,” Apple reduced $200 from

the original price of the iPhone just two months after its release. After a flood of complaints

by its customers, Apple attempt to rectify complaints by offering $100 store credit to early

iPhone customers. In addition to temporal price discrimination, Apple practices price

discriminate on via versioning where it proposes many versions of products according to the

needs and prices of their customers‟.

Conclusion

The challenge for Apple is to keep coming up with proprietary products that fuel its business

model, which is based on innovation and R&D for both hardware and software. Apple‟s

pricing strategies include setting the price high at the start of launching a new product. After

gaining some profits from its early customers who are often fascinated with new technology,

Apple seems to reduce its prices in order to make it affordable and popular among other

competitive products. Not to mention the fact that Apple‟s iPhone and iPod prices change

according to its customers as well as geographical locations.

Basically, the company adapts prices according to the customers‟ ability to pay in different

countries. In addition to applying versioning and skimming pricing strategies, Apple also

practices vertical bundling, linking the use of an iPod to the use of its iTunes stores. The

company argues that protecting iTunes codes is in fact encouraging innovation. However, it

also allows the company to control a large part of: portable digital media player market,

online music market and online video market. At the same time, it maintains sufficient

economic power in these markets in order to control consumer pricing, which ends up having

its consumers pay higher prices.

With its iPhone, Apple has tried to bind users to AT&T in the US, Orange in France, T-

Mobile in Germany and O2 in the UK. However, low sales rates in European countries have

shown that iPhone prices were in fact too in comparison to similar smart phones issued by its

competitors on the phone market. In order to respond to this challenge, Apple has used its

best arm - innovation and will soon issue a new version of the iPhone, which is expected to re

launch iPhone sales.

2. The Sony Walkman Line

Shu Ueyama of Sony cites that this invention (of the Sony Walkman) was purely accidental.

Organizational changes were taking place at Sony in 1979 and the tape recorder division was

pressed to market something soon, or risk consolidation. They came up with a small cassette

player capable of stereo playback. The invention was born from a tweaked Pressman (Sony's

monaural portable cassette recorder) and a pair of headphones.

The next task was marketing the product. The story behind Sony's market research was

legendary: they didn't do it! Said Akio Morita in a 1982 Playboy interview, "The market

research is all in my head! You see, we create markets." But how does one convince the

public they need a product that they've never owned or seen? The first step was to get the

word out to people who had influence on the public, like celebrities and people in the music

industry. Sony sent Walkmans to Japanese recording artists, TV and movie stars free of

charge. They also began an innovative marketing campaign, targeting younger people and

active folks. The Walkman was engineered carefully to make it affordable to this market,

priced to be around 33,000 yen (USD 167). The imagery Sony successfully used around

their Walkman gave the feelings of fun, youth and most importantly, freedom. Their

invention allowed one to bring an exceptional listening experience anywhere.

The walkman had different names in different regions and also different demands. It was

known as the “soundabout” in the US, as “stowaway” in the UK and as “freestyle” in

Sweden.

Source : Sony Corporation, The Walkman Line

Many groaned after seeing the $150 price tags of Sony and Toshiba and settled for their $20

earphone-clad radios until names like Unic, Randix Audiologic. Craig and Yorx came along

cheap personal stereos. Discount manufacturers seized the opportunity during the portable

stereo craze. Products similar in shape and functionality (but not necessarily quality) were

marketed as the Walkman, using photographs of people on the go, in sneakers, roller skates

and on bicycles. Fortunately, these companies made a personal stereo available for everyone.

Sony offered their affordable Walkman II, or WM-2 in a small, shapely all-metal chassis.

This remains the most successful model of all time, selling 2 1/2 million units. By 1983,

everyone was shopping for a personal stereo.

Several initial players in the personal stereo market dropped out as the '80s endured, but

Sony, Aiwa, Toshiba, Sharp, Panasonic and Sanyo thrived. Product lines widened from $25

"disposables" to $200 professional-grade models.

Pricing strategy of a failed revolutionary product:

1. Apple Newton

There is one product in Apple's history of shining accomplishments that sends shudders down

the spine of all Apple stockholders.

In fact, the Newton was a brilliant idea, that was way ahead of its future competitors. What

was it? Merely a personal digital assistant, with all the purported features of a future

PalmPilot. The only difference was that the first Newton shipped nearly 4 years earlier than

the first PalmPilot. It also tanked, whereas the Palm did not.

The problems with the Newton were many. It has been reported that Apple rushed the

development of the Newton. They also tried to push the Newton at a price point that was too

high for the average consumer. Some applications were buggy, and contrary to the Apple

model of today, rudimentary compared to the other software available in the '90's.

Then, there were the marketing problems. Apple's propaganda department put forth the

question "What is Newton?". Just genius, except they asked an open-ended question, and

never really gave an answer. In addition, they promised features that could not be delivered

via the technology of the time. In an interview I once read, one of the people who worked on

the Newton project knew it was dead from the moment he read the marketing brochure.

It said something to the effect of " The Apple Newton can read your handwriting." It could

not, of course. The gloriously expensive hunk of silicon could interpret gestures and a few

low-level commands, but nothing approaching intelligent interpretation of handwriting.

The main problem it suffered from was hardware pricing. Later, well received versions of the

Newton went for upwards of $1100. At this point, the Palm had been introduced. The price

point was a much lower $450, and any user with half a brain was willing to pay $650 less for

a device with most of the same features.

When Steve Jobs returned, the Newton was on its way out. It has been projected that Apple

spent over a billion dollars in development of the Newton project, and made less than one-

fifth of that amount in returns. Not only were the expenses out of sight, but so were the

chances of Apple leading the PDA market. Windows was on the scene with CE, Palm owned

the market, and Handspring was on the horizon ready to make a run. Apple cancelled the

project, and reabsorbed the spinoff that developed the Newton OS.

So what has changed in Apple's strategy? What has kept another Newton from haunting the

company? It's a simple change in strategy:

The first part was bringing back Steve Jobs as figurehead of the company. Since his return, he

has not made the mistake of asking a question like "What is Newton?". If he does, then he

does not make the mistake of never answering it to satisfaction. Apple now defines what their

products mean, what they will mean to the consumer.

The software was buggy on the Newton, and the product was rushed to market. Apple does

not make that mistake now. They test their software, user interfaces, and everything else in

the product to make sure it is at acceptable quality levels before release. Usability has been

the center of Apple's success, and they aren't going to stop now.

Apple takes a grand idea, and then improves on it based on its success. First came the iPod,

the iPod nano, the shuffle,then the iPod with video support, then iPhone, then the iPod with

802.11 g. On and on it will go, as Apple reduces prices of previous models, and makes a

profit on its quickly obsolete inventory. This has kept stock prices high, and kept Apple fresh

in the mind of consumers.

Lastly, there is the cool factor. Their has always been a hardcore group of Mac users who

would buy anything that Apple produced. In recent days, Apple has expanded that group, via

their promotion of Apple products as a lifestyle brand, rather than strictly a technology

choice. Owning Apple products makes a statement about the user. They like trends, recognize

them, and are a discerning consumer. Apple is now a proprietor of fashion and culture, like

Gucci or Louis Vuitton. This status ensures that their products will be desired and bought for

the forseeable future.

Apple is at its best when innovation, usability, and profitability meet. The pursuit of these

three will keep Apple from producing the next Newton for the forseeable future. Hopefully,

you will be able to apply the successes of Apple to your own entrepreneurial pursuits, and

have some measure of success yourself.

2. REVA: a successful failure

INDIA'S FIRST ELECTRIC CAR, REVA is the product of a joint venture between

Bangalore-based Maini Group and California-based Amerigon Electric Vehicle Technologies

Inc. The REVA is designed for city commuters across the globe, for an economical and

pollution free driving experience. It is designed for low speed, congested, urban conditions.

Being efficient and cost-effective, the REVA has the lowest running cost in the world! This

has attracted markets world over.

The car boasts of many revolutionary aspects like:

Easiest car to drive:

It is a fully automatic (no clutch - no gears), two-door hatchback, easily seats two

adults and two children. A small turning radius of just 3.5 metres makes it easy to

park and manoeuvre in difficult city traffic conditions.

Easy to charge:

It runs on batteries and as compared to other Electric Vehicles has an onboard charger

to facilitate easy charging which can be carried out by plugging into any 15 Amp

socket at home or work. As simple as charging a mobile phone

High efficiency and reliability:

It is twice as efficient as a petrol driven vehicle and has an operating cost as low as 40

paise / km.

Low maintenance / easy serviceability:

REVA requires extremely low maintenance because of the minimum number of

moving parts.

Very safe:

REVA has the best-in-class safety features like dent-proof ABS body panels, side-

impact beams, a steel space frame and dual-braking system. This ensures minimum

damage to the car and enhances protection to passengers in the event of a collision

Cost saving per month In Rs.

Items REVA CONVENTIONAL CAR

Average On Road Price (Rs) 400000 400000

Depreciation allowed in Yr 1 320000 60000

Tax Benefit 108800 20400

Tax savings (Rs) 88400

Electricity cost (Rs/Unit) 3.6

Total operating Cost/month 607.5 6214

Total operating Cost/annum 7290 74568

Cost Savings for REVA 67278

Fuel savings on REVA (Rs) 71925

Total Savings (Rs)/annum 160325

Since its launch in Bangalore in 2002, Reva Electric Car Company (RECC), a joint venture,

has run into trouble. This has basically happened to the failed pricing strategy. The car, which

was to cost Rs.162,000 ($3,404-4,255) originally, debuted at more than Rs 200,000.

This high pricing of this otherwise revolutionary product for Indian market had led to its

failure amplified due to other reasons like:

1. An electric vehicle in India, where even petrol cars have not reached peak penetration

yet. EVs, in fact, have not caught on as a concept even in the U.S., where many states

require automobile manufacturers to spend a portion of their budgets on alternative-

fuel vehicles. Over the last decade many automakers have chalked out huge R&D

programs to design alternative-fuel vehicles. The alternatives are battery power, solar

power, hydrogen-based and so on. Yet, those that have come beyond the drawing-

board stage have barely reached commercialization. Apparently, Reva was ahead of

its time. India is not seen as a place where new technologies succeed well. It is

considered uneconomical and worse, downright adventurous to invest money in a new

product, let alone a whole new technology.

2. With a two-door hatch back and a payload of 500 lbs (2 adults and 2 kids), Reva can

cover 50 miles. The car also has a microprocessor-based battery management system:

a 48-volt, 200-amp/hr EV tubular lead acid battery that costs about $450. This battery,

perhaps, is the weakest link in a car otherwise well-designed: it needs a replacement

every three years, which adds to the car's running cost.

3. The Indian government does not provide any subsidy given to Electric Vehicle (EV)

manufacturers in other countries like USA and UK. Thus the price at which the car is

available to the Indian buyers remains much higher than in the other countries. Except

for the hype about reducing air pollution, the Indian government has done little to

help to ventures like an EV. The current awareness is almost negligible and

aggressive marketing efforts are needed to ensure its acceptability on a large scale.