Taking The Call On Pricing In IT-Part I

Pricing-one of the original four basic P's of marketing is one factor that
can help one hit the sweet spot in business. On the other hand, it is also the
one factor which if estimated wrongly in a repeated fashion, will surely take
the business southwards. In the IT scenario, pricing objectives would be
different for the vendors who are eying brand creation and those looking to make
a quick buck.

Pricing needs to be figured out with four key objectives that are the
foremost on our minds:

Bottom first

As the name suggests, this is all about the bottom line at the end of the
year. This manifests itself as the pricing philosophy of the maximum number of
companies worldwide. Some companies simply mark up the products with a
percentage on sales or a percentage return on investment. Many smaller resellers
and dealers use this method as a pricing objective, wherein they set a
percentage markup on sales that is sufficient to cover planned operational
expenditure (cost of operations) and also cover a targeted annual profit. It's
almost like giving oneself a salary.

Oddly this 'Bottom line first' method is used by small resellers, and
industry and business segment leaders. Due to the strong position that they
enjoy in the industry, they are allowed to price their products irrespective and
independent of their competitions' pricing. Here they simply go for a fairly
large profit margin target and price the products towards achieving these ends.
It is noteworthy that this method works only because these companies already
have achieved a leadership position and brand recognition that attracts
customers towards them. Yet these companies need to constantly plough back a
significant portion of these investments back into the R&D and product
innovation.

Another form of the same approach is oriented towards maxing out profits on a
product kitty, irrespective of the competition and the specific price for a
specific product. To achieve such a goal, the company would draw out a sheet
with the entire product portfolio and the expected numbers detailed. This is
then tallied against the competition pricing and the maximum price that can be
obtained on the so called 'run-rate-items' (the run-rate-items are essentially
regular products that sell in large numbers off the shelf and are stocked in
equally large quantity by the channels). The next step would be to price the
standard items close to the competition while all non-standard products would be
priced as high as possible. Some may have a negative connotation for this method
of pricing, as it encourages a company to price certain products through the
roof, but then in such cases, it is best to look at the complete solution rather
than the part.

Some products become so replicable that the brand does not fetch a premium
and the only way to ensure profitable operations is to sell these as a solution.
Many system integrators follow this method, as also companies with diversified
portfolio of products as well as those selling a combination of services and
products together.

Stick-to-the-top

The name lends a clue to the topline focused approach; the idea essentially
is to garner as much marketshare as possible. It does not follow the balanced
approach of increasing marketshare only up to the point there in a continued
rise in overall profits. Instead, it advocates increasing the marketshare
irrespective of the margins.

The long-term benefit of this approach is the possibility of becoming the de
facto vendor of choice but the negatives of monopolistic business come into
play. For a company following this kind of a pricing strategy, the key factor
that could indicate the robustness of its business would be its marketshare
rather than the RoI or bottomline. At times, the company may even will to face a
small loss for a short period just to penetrate a further marketshare. Holding
on to the existing marketshare or increasing it (hence the topline) could be a
good strategy in a fast growing market.

Follow the market

Many firms just follow market both in terms of the products on offer as well
as the prices at which they are offered. There is, for such companies,
absolutely no impact of either the cost of production or of their set-up costs.
The consistency in pricing products or services based on the competition is
bound to be noticed sooner or later. It works in the short term to get one
through an unstable market and to maintain marketshare, but as a long-term
strategy, this is a sure way of losing out.

Terminator on the loose

Just like the movie by the same name, it amounts to going all out for the
primary competition and about terminating its association with the customers.
This pricing approach involves tracking the competition price and improving it
with a better value proposition. One of the primary preconditions to try this
strategy is longevity and stability of the aggressor company. It requires being
swift-footed and reacting to the market on a regular basis. It would require one
to offer something even better repeatedly in the face of competition as the
competitor, while getting strangulated, is bound to offer better deals just to
stay afloat and keep the numbers rolling.

At times, even a small company can try this approach to rapidly build
marketshare. It may neither have to offer an elaborate (and costly) set-up to
maintain the products, nor live up to the baggage of a prior reputation or prior
pricing levels. Sometimes a company is just not able to cut price even though it
wishes to; because of the kind of prices at which it may have sold similar goods
in the past and the backlash that it would get as a brand for dropping prices
significantly. A price drop can lead to piled up stocks and the loss of good
will from old customers. On the other hand, a newer competitor who has no past
to live up to and can use the novel technology or raw material cost gains (to
control the prices) can pretty much wipe out the incumbent player.

The strategy finally chosen may vary from vendor or channel partner to
another due to the peculiar situation it finds itself in and the overall end
objectives. It's definitely not a case of 'one size fits all'.

Part II of this article will be carried in the next issue of DQ Channels