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Chapter 10 Application Questions
- Based on the opening vignette of this chapter, answer the following questions.
a. Do you think Apple set the price appropriately for the iPhone at launch in June 2007? Why or why not?
The 3C’s of pricing say that companies must take into account costs, customers’ willingness to pay, and competitors’ prices before setting price.
Customers’ willingness to pay is influenced by their reference price, which, in turn, is influenced by competitors’ prices. When a company sets a price for a high-tech product, it should hold this price for at lest a year in order to properly position the product, or there could be confusion in the marketplace.
On all these dimensions it seems clear that Apple did not price the iPhone appropriately at launch in June 2007. First, survey data in February 2007 and the writings of technology analysts indicated that the price was too high for consumers. At $499 the low-end iPhone was double the reference price of $250 for a SmartPhone and approached the price of a Sony Playstation 3 that offered way more functionality. Although sales data from the first two months after launch indicated no lack of demand at the inflated price, this is probably because the demand during this time was from innovators and early adopters who are less price sensitive than the mainstream consumer. The inflated prices could have been a barrier to adoption by mainstream consumers later.
b. Was the $200 price cut for iPhone on September 5, 2007 a good move by Apple? Why or why not?
Apple realized that it had made a mistake in pricing the iPhone too high at launch. When a company realizes a mistake, it is best to take corrective action sooner rather than later. Therefore, the price cut announcement on September 5, 2007 was a good move, the timing was right for the critical holiday shopping season to follow. The revised price of $399 (instead of $599) was more in line with expectations of the mainstream consumer. While this did introduce some confusion in the marketplace in the short-term, it would provide longer-term stability in positioning the product.
c. How do you think Steve Jobs handled the response to loyal iPhone customers’ anger? How (if at all) would you do this any differently?
Steve Jobs did the right thing by apologizing to loyal iPhone customers on the Apple web page and offering them refunds and credits to alleviate perceptions of unfairness relative to new customers. However, he should have offered $200 refunds to all iPhone customers who had purchased within the first two months rather than restricting this to those who had purchased within 14 days of the price cut announcement. Perceptions of unfairness would remain for customers who purchased more than 14 days before September 5 and were offered just a $100 credit instead of a $200 refund.
- Based on the chapter’s Technology Expert’s View from the Trenches, answer the following questions.
- Identify the shifts in pricing trends for e-commerce software. Give an example of a company other than RightNow that illustrates each trend.
Two pricing trends for e-commerce software have evolved over the past 10 years.
First, pricing is based more on usage transactions now rather than the number of end-users or the number of computers using the software. Customers who do more transactions are charged more on the assumption that they get more value from using the software.
Second, e-commerce software pricing is being linked directly to the quantifiable value it generates for the customer, when this can be measured. Both pricing trends are made possible with new “software as a service (Saas)” technology. IBM data centers have been practicing the first type of pricing. They call it utility computing or on-demand computing. Amazon offers similar services, also called cloud computing. eBay practices the second type of pricing with its final value fee for sellers being a percentage of the final bid price of auction transactions.
- Explain the idea of pricing based on customer value. Give an example of a company other than RightNow that practices this kind of pricing along with how it sets prices based on customer value.
Pricing based on customer value involves setting the price of software by linking it to the incremental revenue or cost savings it generates for the customer. In the previous eBay example, eBay charges higher final value fees to sellers based on predefined price ranges. Big ticket items are charged higher final value fees than smaller ticket items because the former generate more incremental revenue for sellers compared to the latter.
- One of the recommendations of the Technology Expert is that software marketers should allow their clients to try their product risk free. Pick three software products that you are familiar with. Use the Web to research these products, and summarize how and to what extent they implement this policy.
Students will vary in their choice of products and the research they present in response to this question. Some useful examples may be PC security software (free version and paid versions); trial versions of Web access offered by cell phone companies for one month (such as Verizon Navigator); etc. Apple has sometimes offered free trials for its computers on a one-month trial (this is available to professors).
The issues in offering a free trial are the extent to which:
* the complexity of the product is low enough that users can easily try the product (simple, intuitive user interface);
* the benefits of the product are easily/readily observable (how does one know if a new security software is doing a better job than a different one)?
* there are no switching costs from a prior version of the product (does data have to be loaded into the new software for data crunching in the case of metrics, say).
An interesting “spin” on free trial is to use a product versioning strategy, and offer a basic version of the software for free, and a paid or “professional” version that is fully loaded. An article in Wired magazine by Chris Anderson, “Why Free is the Future of Business,” suggests that 1% of a paying subscriber base can support 99% free users. This is an interesting idea that warrants exploration. (Note this is different than a “free” pricing model such as Google, in which advertising is the source of revenue rather than “product” revenues.)
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