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HBR first published this article in November as a practical guide to the problems involved in pricing new products. Particularly in the early stages of competition, it is necessary to estimate demand, anticipate the effect of various possible combinations of prices, and choose the most suitable promotion policy. To update his original statement, Mr. Dean has written a retrospective comment, which appears at the end of this article.
He amplifies his earlier article with insights from intervening years and in light of such developments as inflation. How to price a new product is a top management puzzle that is too often solved by cost theology and hunch. New products have a protected distinctiveness which is doomed to progressive degeneration from competitive inroads. The invention of a new marketable specialty is usually followed by a period of patent protection when markets are still hesitant and unexplored and when product design is fluid.
Then comes a period of rapid expansion of sales as market acceptance is gained. Next the product becomes a target for competitive encroachment. New competitors enter the field, and innovations narrow the gap of distinctiveness between the product and its substitutes. Throughout the cycle, continual changes occur in promotional and price elasticity and in costs of production and distribution. These changes call for adjustments in price policy.
Appropriate pricing over the cycle depends on the development of three different aspects of maturity, which usually move in almost parallel time paths:.
Technical maturity, indicated by declining rate of product development, increasing standardization among brands, and increasing stability of manufacturing processes and knowledge about them. Market maturity, indicated by consumer acceptance of the basic service idea, by widespread belief that the products of most manufacturers will perform satisfactorily, and by enough familiarity and sophistication to permit consumers to compare brands competently.
Competitive maturity, indicated by increasing stability of market shares and price structures. Of course, interaction among these components tends to make them move together. That is, intrusion by new competitors helps to develop the market, but entrance is most tempting when the new product appears to be establishing market acceptance. The rate at which the cycle of degeneration progresses varies widely among products.
What are the factors that set its pace? An overriding determinant is technical—the extent to which the economic environment must be reorganized to use the innovation effectively. The scale of plant investment and technical research called forth by the telephone, electric power, the automobile, or air transport makes for a long gestation period, as compared with even such major innovations as cellophane or frozen foods. Development comes fastest when the new gadget fills a new vacuum made to order for it.
Products still in early developmental stages also provide rich opportunities for product differentiation, which with heavy research costs holds off competitive degeneration. But aside from technical factors, the rate of degeneration is controlled by economic forces that can be subsumed under rate of market acceptance and ease of competitive entry.
Market acceptance means the extent to which buyers consider the product a serious alternative to other ways of performing the same service. Market acceptance is a frictional factor. The effect of cultural lags may endure for some time after quality and costs make products technically useful. The slow catch-on of the garbage-disposal unit is an example. On the other hand, the attitude of acceptance may exist long before any workable model can be developed; then the final appearance of the product will produce an explosive growth curve in sales.
And, of course, low unit price may speed market acceptance of an innovation; ball-point pens and all-steel houses started at about the same time, but look at the difference in their sales curves. Ease of competitive entry is a major determinant of the speed of degeneration of a specialty. An illustration is found in the washing machine business before the war, where with little basic patent protection the Maytag position was quickly eroded by small manufacturers who performed essentially an assembly operation.
Frozen orange juice, which started as a protected specialty of Minute Maid, sped through its competitive cycle, with competing brands crowding into the market. At the outset innovators can control the rate of competitive deterioration to an important degree by nonprice as well as by price strategies.
Through successful research in product improvement innovators can protect their specialty position both by extending the life of their basic patents and by keeping ahead of competitors in product development. The record of IBM punch-card equipment is one illustration. Ease of entry is also affected by a policy of stay-out pricing so low as to make the prospects look uninviting , which under some circumstances may slow down the process of competitive encroachment.
Pricing problems start when a company finds a product that is a radical departure from existing ways of performing a service and that is temporarily protected from competition by patents, secrets of production, control at the point of a scarce resource, or by other barriers.
The seller here has a wide range of pricing discretion resulting from extreme product differentiation. Apparently this advantage resulted from 1 a good product that was distinctive and superior and 2 substantial and skillful sales promotion.
To get a picture of how a manufacturer should go about setting a price in the pioneer stage, let me describe the main steps of the process of course the classification is arbitrary and the steps are interrelated : 1 estimate of demand, 2 decision on market targets, 3 design of promotional strategy, and 4 choice of distribution channels. The problem at the pioneer stage differs from that in a relatively stable monopoly because the product is beyond the experience of buyers and because the perishability of its distinctiveness must be reckoned with.
How can demand for new products be explored? How can we find out how much people will pay for a product that has never before been seen or used? There are several levels of refinement to this analysis. The initial problem of estimating demand for a new product can be broken into a series of subproblems: 1 whether the product will go at all assuming price is in a competitive range , 2 what range of price will make the product economically attractive to buyers, 3 what sales volumes can be expected at various points in this price range, and 4 what reaction will price produce in manufacturers and sellers of displaced substitutes.
The first step is an exploration of the preferences and educability of consumers, always, of course, in the light of the technical feasibility of the new product. How many potential buyers are there? Is the product a practical device for meeting their needs? How can it be improved to meet their needs better? What proportion of the potential buyers would prefer, or could be induced to prefer, this product to already existing products prices being equal? Sometimes it is feasible to start with the assumption that all vulnerable substitutes will be fully displaced.
For example, to get some idea of the maximum limits of demand for a new type of reflecting-sign material, a company started with estimates of the aggregate number and area of auto license plates, highway markers, railroad operational signs, and name signs for streets and homes.
Next, the proportion of each category needing night-light reflection was guessed. For example, it was assumed that only rural and suburban homes could benefit by this kind of name sign, and the estimate of need in this category was made accordingly.
For example, in developing a new type of camera equipment, one of the electrical companies judged its acceptability to professional photographers by technical performance without making any inquiry into its economic value.
When the equipment was later placed in an economic setting, the indications were that sales would be negligible. The second step is marking out this competitive range of price. Manufacturers of electrical equipment often explore the economic as well as the technical feasibility of a new product by sending engineers with blueprints and models to see customers, such as technical and operating executives.
For example, a manufacturer of paper specialties tested a dramatic new product in the following fashion: A wide variety of consumer products totally unlike the new product were purchased and spread out on a big table.
Consumers selected the products they would swap for the new product. By finding out whether the product would trade evenly for a dish pan, a towel, or a hairpin, the executives got a rough idea of what range of prices might strike the typical consumer as reasonable in the light of the values received for his or her money in totally different kinds of expenditures. But asking prospective consumers how much they think they would be willing to pay for a new product, even by such indirect or disguised methods, may often fail to give a reliable indication of the demand schedule.
Most times people just do not know what they would pay. It depends partly on their income and on future alternatives. Early in the postwar period a manufacturer of television sets tried this method and got highly erratic and obviously unreliable results because the distortion of war shortages kept prospects from fully visualizing the multiple ways of spending their money.
One appliance manufacturer tried out new products on a sample of employees by selling to them at deep discounts, with the stipulation that they could if they wished return the products at the end of the experiment period and get a refund of their low purchase price.
Demand for foreign orange juice was tested by placing it in several markets at three different prices, ranging around the price of fresh fruit; the result showed rather low price elasticity.
While inquiries of this sort are often much too short-run to give any real indication of consumer tastes, the relevant point here is that even such rough probing often yields broad impressions of price elasticity, particularly in relation to product variations such as styling, placing of controls, and use of automatic features.
The third step, a more definite inquiry into the probable sales from several possible prices, starts with an investigation of the prices of substitutes. Usually the buyer has a choice of existing ways of having the same service performed; an analysis of the costs of these choices serves as a guide in setting the price for a new way. Comparisons are easy and significant for industrial customers who have a costing system to tell them the exact value, say, of a forklift truck in terms of warehouse labor saved.
Indeed, chemical companies setting up a research project to displace an existing material often know from the start the top price that can be charged for the new substitute in terms of cost of the present material.
But in most cases the comparison is obfuscated by the presence of quality differences that may be important bases for price premiums. This is most true of household appliances, where the alternative is an unknown amount of labor of a mysterious value. In pricing a cargo parachute the choices are: 1 free fall in a padded box from a plane flown close to the ground, 2 landing the plane, 3 back shipment by land from the next air terminal, or 4 land shipment all the way.
These options differ widely in their service value and are not very useful pricing guides. Thus it is particularly hard to know how much good will be done by making the new product cheaper than the old by various amounts, or how much the market will be restricted by making the new product more expensive. The answers usually come from experiment or research. The fourth step in estimating demand is to consider the possibility of retaliation by manufacturers of displaced substitutes in the form of price cutting.
This development may not occur at all if the new product displaces only a small market segment. If old industries do fight it out, however, their incremental costs provide a floor to the resulting price competition and should be brought into price plans. For example, a manufacturer of black-and-white sensitized paper studied the possibility that lowering its price would displace blueprint paper substantially. Not only did the manufacturer investigate the prices of blueprint paper, but it also felt it necessary to estimate the out-of-pocket cost of making blueprint paper because of the probability that manufacturers already in the market would fight back by reducing prices toward the level of their incremental costs.
When the company has developed some idea of the range of demand and the range of prices that are feasible for the new product, it is in a position to make some basic strategic decisions on market targets and promotional plans. To decide on market objectives requires answers to several questions: What ultimate market share is wanted for the new product?
How does it fit into the present product line? What about production methods? What are the possible distribution channels? These are questions of joint costs in production and distribution, of plant expansion outlays, and of potential competition.
If entry is easy, the company may not be eager to disrupt its present production and selling operations to capture and hold a large slice of the new market.
But if the prospective profits shape up to a substantial new income source, it will be worthwhile to make the capital expenditures on plant needed to reap the full harvest. A basic factor in answering all these questions is the expected behavior of production and distribution costs.
The relevant data here are all the production outlays that will be made after the decision day—the capital expenditures as well as the variable costs. A go-ahead decision will hardly be made without some assurance that these costs can be recovered before the product becomes a football in the market.
Many different projections of costs will be made, depending on the alternative scales of output, rate of market expansion, threats of potential competition, and measures to meet that competition that are under consideration. But these factors and the decision that is made on promotional strategy are interdependent.
Department of Economics, Ph. Perloff,Jeffrey M. Bresnahan, Timothy F. Willig ed. Lerner, Larry S. McCalla,
Official websites use. Share sensitive information only on official, secure websites. Monopoly power can harm society by making output lower, prices higher, and innovation less than would be the case in a competitive market. This monopoly-power requirement serves as an important screen for evaluating single-firm liability. It significantly reduces the possibility of discouraging "the competitive enthusiasm that the antitrust laws seek to promote," 5 assures the vast majority of competitors that their unilateral actions do not violate section 2, and reduces enforcement costs by keeping many meritless cases out of court and allowing others to be resolved without a trial.
The basic purpose of the project is to determine the profit impact of market strategies PIMS. The earlier article established a link between strategic planning […]. The earlier article established a link between strategic planning and profit performance; here, with additional data, the authors come up with a positive correlation between market share and ROI. The authors discuss why market share is profitable, listing economies of scale, market power, and quality of management as possible explanations; then, using the PIMS data base, they show how market share is related to ROI. Specifically, as market share increases, a business is likely to have a higher profit margin, a declining purchases-to-sales ratio, a decline in marketing costs as a percentage of sales, higher quality, and higher priced products. Data also indicate that the advantages of large market share are greatest for businesses selling products that are purchased infrequently by a fragmented customer group. They conclude by advising companies to analyze their own positions in order to achieve the best balance of costs and benefits of the different strategies.
Understanding the extent to which firms exert market power is important for assessing the role and impact of a wide range of economic policies, including anti-trust, trade policy and tax policy among many others. Focussing solely on high levels of concentration, though it may provide prima facie evidence of market power that may affect the outcome of policy changes, does not necessarily imply that firms are behaving anti-competitively or exploiting their potential market power. To this end, evaluating the extent to which firms do exert market power should be the focus of attention. There is a long history in industrial organisation of research that has addressed this issue, ranging from earlier industry cross-section studies associated with the structure—conduct—performance SCP paradigm through to the new empirical industrial organisation involving
Before , most of the domestic copper production in the US and an important share of imports were traded at a price set by the major US producers. At the same time, the rest of the world was trading copper at prices determined in auction markets. This two-price system ended in , when the largest US producers began using the Comex price of refined copper as a benchmark for setting their prices. Using this regime shift, I empirically test the competitive behavior of the US copper industry before The results show that copper prices were close to the levels predicted by a competitive model of the industry.
It is also an important topic for managers and for managerial economics, since it can be related to sustainable advantage for a company and it is usually at the center of antitrust cases in which a company may be involved. This chapter defines market power, discusses how it arises, and describes the various methods that have been used for empirically detecting and measuring it. Attention is also given to the role and measurement of market power in important antitrust contexts. Keywords: market power , monopoly , oligopoly , competition , Lerner index , S-C-P paradigm , antitrust , merger guidelines.
HBR first published this article in November as a practical guide to the problems involved in pricing new products. Particularly in the early stages of competition, it is necessary to estimate demand, anticipate the effect of various possible combinations of prices, and choose the most suitable promotion policy. To update his original statement, Mr.
Через несколько секунд всем стало ясно, что эта затея бессмысленна. Числа были огромными, в ряде случаев не совпадали единицы измерения. - Это все равно что вычитать апельсины из яблок, - сказал Джабба.
Бринкерхофф кивнул. Это было одним из крупнейших достижений Стратмора. С помощью ТРАНСТЕКСТА, взломавшего шифр, ему удалось узнать о заговоре и бомбе, подложенной в школе иврита в Лос-Анджелесе. Послание террористов удалось расшифровать всего за двадцать минут до готовившегося взрыва и, быстро связавшись по телефону с кем нужно, спасти триста школьников.
Я понимаю. - Беккер запнулся. - Но тут… тут слишком. Мне нужны только деньги на такси.
Через пять секунд она вновь закроется, совершив вокруг своей оси поворот на триста шестьдесят градусов. Сьюзан собралась с мыслями и шагнула в дверной проем. Компьютер зафиксировал ее прибытие. Хотя Сьюзан практически не покидала шифровалку в последние три года, она не переставала восхищаться этим сооружением. Главное помещение представляло собой громадную округлую камеру высотой в пять этажей.
Партнер Танкадо - призрак. Северная Дакота - призрак, сказала она. Сплошная мистификация.
Это касалось и права людей хранить личные секреты, а ведь АНБ следит за всеми и каждым.
Какой номер вы набираете? - Сеньор Ролдан не потерпит сегодня больше никаких трюков. - 34-62-10, - ответили на другом конце провода. Ролдан нахмурился. Голос показался ему отдаленно знакомым. Он попытался определить акцент - может быть, Бургос.
Тридцать два, - уточнил Стратмор. - У него был врожденный порок сердца. - Никогда об этом не слышала. - Так записано в его медицинской карточке. Он не очень-то об этом распространялся.
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