Is the Price Right?

When Standard & Poor’s downgraded the US credit rating, the agency acknowledged that the government's “economic, external, and monetary credit attributes” were “broadly unchanged.” However, the perception that the American “brand” was of less value than before the debt-limit legislation was approved was enough to prompt the historic action.

A similar dynamic is at play every day in the electronics market. Image and branding have always played a huge role in driving sales, but today there is much more to branding than just marketing and public relations. In fact, it could be argued that engineering and supply chain professionals set the stage for creating a product’s brand identity through the choices made in the earliest phases of new product development.

Technology and supplier selection can have a tremendous impact on the pricing of a product throughout its life cycle, and strategic pricing is an increasingly important element of effective brand management.

As a product moves through its life cycle, the cost to produce it changes, as does the profitability. An effective life cycle pricing strategy not only determines the extent to which a company can maximize profit, but it also influences the perceived value of your brand. A company that drop prices on older-generation products when it releases the next generation not only negates the possible margin opportunities inherent in servicing customers who are not ready or willing to switch to the new product or technology, but it also fuels the very real risk of diminishing the perceived value of the new product as customers see the older generation as a better deal.

A long-term pricing strategy must consider not just the cost to produce a product, but also the competitive environment, market demand, and customers’ notion of value. Furthermore, these factors must be reassessed as the product progresses through the phases of introduction, maturity, and decline.

Supply chain professionals can support this process by carefully tracking critical components, so they can create a plan for procuring these essential parts if/when the supplier discontinues support for them. The better you do this, the less likely it is that your company will have to make reactive pricing decisions based on desperation, rather than the best business case.

In addition to maintaining regular communications with major suppliers, purchasers can discuss options with their distributor partners, which are likely to have the best visibility into different sourcing alternatives, such as an authorized remanufacturer, die storage, or inventory stockpiling. Distributors like Avnet work frequently with customers to help them do a thorough cost-benefit analysis of these options.

According to the management consulting firm Accenture, a successful integrated pricing strategy not only can improve customer satisfaction, but also can help reduce inventory by 12-33 percent and expand incremental annual revenue 1-8 percent with no additional resource deployment.

As tenuous economic conditions continue to challenge profitability throughout the electronics sector, procurement and development professionals must step up their efforts to help their organizations move beyond cost-plus pricing and support a strategic pricing model that can maximize return on investment and enhance brand image.