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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.

7 comments on “Is the Price Right?

  1. FLYINGSCOT
    September 9, 2011

    I imagine the more people looking at product lifecycle costs and planning to reduce them can only be a good thing.  Price is heavily driven by competition so the trick is to produce a product that everyone wants yet nobody except you can produce.  Apple pie and motherhood I suppose.

  2. itguyphil
    September 9, 2011

    “Price is heavily driven by competition so the trick is to produce a product that everyone wants yet nobody except you can produce”

    flyingscot,

    Umm I agree with you to a point. I think that it's not about you being the only one to produce it, but you must make the user ONLY want it from you, or prefer you over any other competition. At that point, price no longer matters, especially if it is considered a premium offering.

  3. Adeniji Kayode
    September 9, 2011

    @Pocharle. I agree with you  on that.On the other hand, being the first to enter has its advantages and disadvantages but as you rightly said- do things that make users to prefer you above others. Sometimes “others'' too don,t just fold their arms and go to sleep.

  4. eemom
    September 9, 2011

    @pocharle

    I agree with you.  Brand name has amazing influence on people.  I do agree also with @Kayode that being first to market is also key. Apple wrote the book on a successful company with a respected name brand that is consistently innovative in its product offering.  I think one without the other can be beat but the combination of the two has proven quite successful.

     

  5. jbond
    September 10, 2011

    This is an excellent article that brings up some very valid points. Lowering prices of older models as new ones come out is a common practice and one that many consumers pay close attention to. Take Apple for instance. Right now if you go to an AT&T store to purchase a phone with a contract, you have a few choices for Iphones. You can get the “old” 3Gs for about $49; get the “close to old” Iphone 4 for about $199. With the introduction of the Iphone 5 in the next couple of months, these older models will drop in price and be more attractive to others. This in turn will hurt the sales of the Iphone 5, though not drastically since we are talking about Apple.

  6. mfbertozzi
    September 10, 2011

    Exactly jbond, I agree with you even your example gives the chance to share something more in addition. People are really attracted by special price (low price)  from ads of flyers, but quite often if you go to store for acquiring a product at the time of a promotion, it is not available with the result reseller tries to sell another one more expensive…

  7. prabhakar_deosthali
    September 11, 2011

    Among  the consumers , there are leaders and there are followers. The leaders are the one who want to grab anything that is something new. They wan't to be the first to show off a new gadjet even before it is available in the open stores. For these consumers the price really does not matter. More the price , more reason to show off !

    Then there are followers who are drawn by the charisma of the leaders and want to nuy a product because the leader has bought it. 

    Finally theer is class of consumers, always looking for cheap bargains. these are the consumers who are happy with end of life products or cheap used products. 

    It is essential for a product company to carry out market reasearch   to find out the percentage of each of these category for their future products and plan their pricing and procurement plans accordingly.

     

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