A major issue in creating a new market is figuring out its pricing model. More products have been damaged or irretrievably lost over pricing than over any other issue, with the possible exception of failing to meet the customers' expectations as to features and performance. Now is a good time to address this subject, because object lessons are all around us. (If you think that I've been writing too much about pricing lately, it's just been because there's so much to write about. I promise to write about something entirely different for next week!)

Small, wireless objects which want to be connected to the Web are all around us. Or perhaps I should say vendors of small wireless objects are everywhere, telling us about their wares and showing them to us. Not nearly so many of us are actually buying or using them. We'd argue this is an excellent example of pricing theory in action.

--   There are several wireless objects which have found mainstream markets. These are the cellular phone and the pager. Both were in the marketplace for long periods of time as the toys of gadget-loving businessmen, but not as widely used tools. Pagers became ubiquitous when it became possible to buy a Pager for about $100 and a pager service for as little as $10 per month. This opened up all kinds of mainstream markets from moms who brought them for their suburban school kids to communicate about schedules and transportation to drug dealers who used them to communicate with customers, agents, and lookouts. Pricing counts.

--   In the cellular phone market, the latest (and smallest) phone used to cost $1500 and an acceptable, bulkier technology was generally available for $500 to $700. This did not include pricey and often inconvenient-to-use service with spotty coverage and the need to notify the carrier whenever you left your "home" area. Again, cell phones were mainly for business communication. Until a new pricing model was imagined where the phone company paid for the phone. Buying phones in quantity, lowering the cost, and offering them to users with the price bundled into a service contract made them see "free." Cell phone usage soared. Today, it's not unusual to find families where every member has a cell phone and plans designed to make inter-family phone calls free or nearly so. It was the change in pricing models, allowing individual business consumers and families to see cell phones as necessary and very affordable that changed their market presence.

--   When PDAs first appeared, they were often priced in the $500 to $1,000 range, with relatively primitive wired connectivity. When customers considered these devices on a price/performance basis -- high price, relatively low performance -- it was easy to pass them up. Today, with Palm and its Handspring Visor child offering much higher function products at lower prices, a market has grown around the non-connected devices and with suitable incremental pricing might expand into the wireless market.

But new wireless objects have not found their price points yet. Devices which combine phone and PDA capability and have wireless Internet access are still far too expensive to appeal to mainstream markets. We've looked at devices with lovely screens that were too fat to hold in our hand and too expensive to seriously think (estimated prices around $1,000) they could support a mainstream market. Again, we'd expect the phone company model, where hardware is priced or partially priced into the monthly service fee, could create a bigger market sooner.

THE LAWS OF ECONOMICS WORK VERY WELL IN THE VICINITY OF HIGH TECH PRODUCTS 

All of this is a very long way of saying that the Laws of Economics work very well in the vicinity of high tech products. Customers look them over and make buying decisions which depend on price versus value. Below a certain price point (about $300-$500 for business purchases, $100 for consumer purchases), value becomes a bit less important and concerns like convenience begin to take precedence.

This means that when we price products in new markets, we have to have appropriate expectations:

1.   High prices will mean few customers and should be reserved for products with demonstrably high value. These are almost always business products for large companies and luxury products for upper class consumers. 

It's important to note that in high technology markets, where timing can be unpredictable and the introduction of one new technology may be overlapped or interrupted by the introduction of another, more appealing product, the small market you reach at a higher price may be all the market you ever get to. This means the entrepreneurial idea of charging early buyers a lot to cover start-up costs and then lowering prices to encourage a larger market and/or compete with additional players, may be a false promise.

2.   Lower prices can reach more customers, but prices -- especially in new markets -- must cover marketing costs, including the cost of educating the new market (unless this will be done as an investment, out of some set of deep pockets, with no need for short- to medium- term profitability). 

3.   Lower prices can position products, so it's important that the price not set an inappropriate positioning. For example, you could price a complex data base product at $59.95, but no one in the IT Department would take it seriously and few customers in the SOHO/Consumer market (which is the main place for selling $59.95 data bases) would be able to use it. It would simply wander around, a lost product. Repricing it upwards, into its correct market setting is impossible, because it's lower price will forever haunt it. (The right move here is to sell the technology, if it's good, to another company, embed it into another product, and sell it under another product and company name to the proper audience at the right price point.)

Value is a tricky game. For example, starting in 1992, office PC software vendors (Microsoft, WordPerfect, Lotus, etc.) decided to bundle their personal productivity software into suites so that the offering would appear more valuable and justify relatively high costs, typically $500 or more for a set of three to five applications. What was really going on, of course, was that the vendor had a single strong application with strong customer appeal; the rest of the products in the suite had much less (or in some cases no) separate appeal; that is, they couldn't be sold separately at all. The products sold for prices just above the price of the single application but they looked very valuable -- after all, if you needed any of the other stuff, it was almost free.

In 2001, Microsoft (who now for all intents and purposes owns the Office Suite market with about 95% of current sales) finds it difficult to grow the suite's revenue at its previous pace -- there just aren't enough new customers left. Adding function to the existing suite helps encourage existing customers to upgrade, but not all of them do so -- and this occurs at a hefty discount. And so a new idea evolves: Offer software which is designed to work WITH the Office Suite, but is sold separately (at least for now), so that each sale represents new revenue to the software vendor. Microsoft has always had a few products that worked that way -- Project has always been sold separately, as has its Visio acquisition. Note now the entrance of its recent MapPoint product and its just announced Data Analyzer product. Either could have been a set of features for an existing product. In fact, some of the first reviews for Data Analyzer describe it as a "better graphics" tool for Excel (it isn't -- the data comes from SQL Server -- results may be pasted into Excel or PowerPoint). 

Expect this idea of separately priced products to catch on. It really isn't new.

--   Microsoft (and others) have often introduced new product ideas separately and later added them to other products (or combined products together), as market definitions or customer requirements became better understood. In the meantime, you can get a better idea of just what the new product needs and who might use it in a clearer, crisper way -- and you get to collect some extra revenue.

--   This idea of pricing high-end features (really sets of related features for a particularly market or function) separately makes good sense when the whole market is looking at the idea of software as a service. Many vendors are hoping that they will be able to offer various levels of their software expertise to different markets or sets of users, to maximize their revenue opportunity and, to be fair, to insure that users can choose just the level of product and price that suits their needs. For this to occur, pricing and products must be more granular and the idea of having new products that can be understood as separate offerings look like separate products makes sense in this context.

On the other hand, don't think that combination pricing (the future equivalent of office suites in the early nineties) will go away. It will simply become different and more flexible. So you should expect that you might be offered a personal or corporate license for accountants or analysts that would include Data Analyzer, for example, and one for market researchers that included both Data Analyser and MapPoint and one for Web Wizards that included FrontPage and Word and development tools, but ignored most of everything else. All with prices optimized to both the contents of the package and the market.

This phenomenon won't be restricted to Microsoft or to Office Suites. We'd expect an XSP to provide service offerings that included both performance and software selected for the customer's vertical market and particular worker's particular functions. So an XSP who specialized in the Distribution Sector might have offerings for Wholesale, Retail, and Packaged Goods customers, with performance metrics for various size customers, and specialized offerings for employees in specialty jobs such as forecasting, inventory management, credit and collections, and so forth. To these XSP customers, software will be like spices on the shelf (or paint colors on a palette, to mix metaphors); their job will be to figure out which to choose to please their prospective "guests". 


(If you are particularly interested in the subject of pricing, you may want to return to our May 23rd article on Pricing Software which discussed the many new pricing models customers and vendors are considering and, in some cases, trying.)

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