| If you are like most executives, you are trying to | | | | When brand new, the newer generation chip will often |
| create the proverbial better mouse trap. A lot of | | | | sell for as much as $200 while the chip that is two |
| companies succeed in designing the mousetrap, but | | | | generations old may have dropped to $30. Yet the old |
| don't catch too many mice. Somebody else usually | | | | chip also used to sell for $200 -- just about three |
| moves the mice first. How can pricing be used to | | | | years before. |
| control that situation better? | | | | Most new technologies are about as price elastic as |
| In Silicon Valley and in technical companies | | | | the old technologies that they replace. But occasionally, |
| everywhere, you hear stories about how Apple and | | | | a new one comes along that causes demand to |
| Microsoft "borrowed" from the Xerox Palo Alto | | | | increase faster when prices decline. Then, pricing |
| Research Center. I remember that period well | | | | becomes helpful for controlling the pace of market |
| because our company was a beta test site for the | | | | development. |
| first Xerox in-office computer networks. | | | | If prices are kept too high, the market growth declines. |
| The sales people kept asking us nervously about | | | | If prices are too low, the market explodes, demand |
| whether or not we minded paying the very high prices | | | | cannot be fulfilled, and competitors enter by the |
| that Xerox was asking for the STAR system. We | | | | dozens. Market share is dramatically lost under such |
| kept saying that the quoted price was no limitation, as | | | | conditions by the current suppliers. |
| long as the technology worked. The sales people | | | | On the other hand, by controlling the rate of price |
| looked at us incredulously. | | | | change along with one's own capacity, a far-sighted |
| But we were serious. After the system became to | | | | competitor may be able to seize vast quantities of |
| crash whenever it rained (and it rains a lot in Boston), | | | | market share. Although product innovation is clearly |
| the price suddenly became much too high for us. The | | | | part of its success, Nokia appears to have used this |
| equipment was thoughtfully taken back by our Xerox | | | | approach in part to manage the demand for its |
| representative. | | | | products and its rapidly increasing market share in |
| Extremely attractive new technologies that can be the | | | | digital cellular handsets during the 1990s. |
| basis of improved business models usually turn out to | | | | Be sure you always know what value you are |
| be very price sensitive. When new technologies are | | | | delivering and how your pricing will affect consumption |
| first available, often the only people who can afford | | | | of a new technology. You will probably have to be |
| them are customers for whom a revolutionary way of | | | | fast on your feet with those prices. At a low-enough |
| operating is now possible for the first time. | | | | price, that Xerox network would have stayed with us |
| As others see the technical promise being fulfilled, it | | | | despite its water problems. How might the world have |
| simply becomes a substitution pricing decision. | | | | turned out differently if the price had been a lot lower |
| Customers would prefer the new technology when its | | | | and the reliability a lot higher? |
| price becomes enough lower. | | | | What are the right prices for your better mousetraps? |
| A good example of this can be seen in the transitions | | | | Copyright 2008 Donald W. |
| from one generation of microprocessors to the next. | | | | |