1. Marketing of High-Technology Products and Innovations
Chapter 10:
Pricing Considerations in High-Tech Markets

2. Questions to Consider
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?

3. High-Tech Pricing Environment
Short, Volatile Product Life Cycles
Moore’s Law, Pressure on performance& price
Network Externalities
Unit-One Costs
Customer’s Perceptions of Cost/ Benefit
Competition
The Internet
Backward Compatibility, Derivatives
Investments in R & D
Rapid Pace of Change
Forces on High-Tech
Pricing Decisions
Figure 10-1

4. The High-Tech Pricing Environment
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

5. The High-Tech Pricing Environment (cont’d)
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

6. The Three Cs of Pricing
Figure 10-2

7. Cost Low-Price basis Experience Curve (see figure on next slide)
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

8. Cost: Experience Curve
Per-unit cost declines in production each time the accumulated manufacturing volume doubles.
Figure 10-3

9. Competition 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

10. Customers
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

11. Customers (cont.) 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

12. Customer- Oriented Pricing
Understand exactly how the customer will use the product.
Each end use may have a different cost/benefit analysis
Vertical markets: price accordingly
Focus on the benefits customers receive from using the product
Customers buy benefits, not features

13. Customer- Oriented Pricing (cont.)
Calculate customer costs
Monetary and nonmonetary costs
Understand customer cost/benefit trade- offs

14. Customer- Oriented Pricing: Implications
Pricing decisions:
Are part of product design decisions
Should be made early
Tradeoff analysis and target costing are useful tools

15. Customer- Oriented Pricing: Implications (cont.)
Different segments value the product differently
Different customers yield differential profitability
Costs to serve customers varies
Consumers are affected by perception of fairness

16. Customer- Oriented Pricing: Implications (cont.)
Firms should track profitability of different customer accounts
Some customers are not worth the costs to serve them

17. Pricing of After-Sales Service
Price services based on segmentation
“Basic needs”
want standard service with basic inspections and periodic maintenance
fixed-price, well-defined, limited service contract

18. Pricing of After-Sales Service (cont.)
“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

19. The Technology Paradox
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

20. The Technology Paradox: Solutions
Keep costs falling faster than prices
Economy driven by unit-one costs
Redefine value
Avoid commodity markets.
Maintain a steady stream of innovation
Differentiate offerings
Mass customization

21. The Technology Paradox: Solutions (cont.)
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

22. The Technology Paradox: Solutions (cont.)
Develop long-term relationships with customers
Requires high responsiveness to demand
Focus on revenue from complementary products and services
captive product pricing
advertising revenues

23. The Technology Paradox: Solutions (cont.)
Use smart (dynamic) pricing
Gauge customer sensitivity to price differentials
Have agility and speed in getting products to market

24. Additional Pricing Considerations
What degree of property rights
should the customer have?
Some options:
Outright sale vs. licensing agreements
Single vs. multiple users
Pay-per-use vs. subscription

25. Outright Sale vs. Licensing
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

26. Single vs. Multiple Users
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

27. Pay-Per-Use vs. Subscription Pricing
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

28. Price Promotions 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

29. Chapter Features 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 29

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