NEWPRODUCTPRICING 235
marketingoronline['ccess,this functionmightbeperformedatlowercost.Suchreduc-
tionsofteninvolvesomelossineffectiveness,sothetradeoffmustbeconsideredcarefully.
Historically, oneof theworstoutcomesthatcanresultfrompricinglowerthana com-
petitorisa "pricewar."Pricewarsusuallyoccurwhena businessbelievesthatprice-cut-
tingprodl<cesincreasedmarketsh are,butdoesnot havea truecostadvantage.Pricewars
areoftencausedbycompaniesmisreadingormisunderstandingcompetitors.Typically,price
warsareoverreactions tothreatsthateither aren' t thereat allorarenotasbigastheyseem.
Anotherpossibledrawbackwhenpi"icingbelowcompetitionis thecompany'sinabil-
itytoraisepriceorimage.A retailersuchas K-mart, knownasa discountchain,foundit
impossibletoreposition itselfasa providerofdesignerwomen'sclothiers.Canyouimage
Swatchsellinga$3,000watch?
Howcancompaniescopewiththepressurecreatedbyreducedprices?Someare
redesigningproducts foreaseandspeedofmanufa<::turingorreducingcostlyfeaturesthat
theircustomers donotvalue.Othercompaniesarereducingrebatesanddiscountsinfavor
ofstable,everydaylowprices(ELP).Inallcases,thesecompaniesareseekingshelterfrom
pricingpressuresthatcomefromth e discountma'liathathasbeencommonintheU.S.for
thelast twodecades.
NewProductPricing
Awmewhatdifferentpricingsituationre latestonewproductpricing.Witha totallynew
product, competitiondoes notexistorisminimal.Whatpricelevelshouldbesetinsuch
cases? Twogeneral strategiesare mostcomn:on-penetrationandskimming.Penetration
pricingintheintroductorystageofanewproQucl'slifecyc1emeansacceptinga lowerprofit
Jl1arginandtopricerelativelylow.Such a strategyshouldgenerategreatersalesandestab-
lishthenewproduct inthemarket morequickly.Priceskimminginvolvesthetoppartof
thedemandcurve.Priceis set relativelyhightogenera~ea highprofitmarginandsalesare
limitedtothosebuyers willingtopayapremiumtogetthenewproduct(seeFigure9.3).
NEWSLINE:THERISKOFFREEPC'S
There'snosuchthingasa freePC.Butjudgingfromthecurrentflood
ofoffers forfr eeordeeplydiscountedcomputers,youmightthink
thatthelawsofecon omicsandcommonsensehavebeenrepealed.In
fact,allofthosedealscomewithsignificantstringsattachedand
reqUir e closeexamination.SomeareSImplylosers.Otherscanpro-
videsubstantialsaVin gs,b u t onlyfortherightcustomers.
Theofferscomeintwocategories.Inonetype,consumersgeta
freecomputeralongwithfreeInternetaccess,buthavetoaccepta
constantstreamofadvertisingonthes'~reen.Intheothercategory,
thecustomergetsafreeordeeplydiscountedPCinexchangefora
long-termcontract forpaidInternetservices.
Mostoftheseareattractivedeals,buttheup-frontcommitmentto
$700ormoreworthofInternetservicemeanstheyarenotforevery-
one. OnegroupLhatwillfindlittlevalueinthearrangementiscollege
students,sincenearlyallschoolsprovidefreeandoftenhigh-speed
Netaccess. Otherswhocouldwellenduplosingfromthesedealsare
thelightestandheaviestusersoftheInternet.Peoplewhowant
Interneta ccessonlytoreade-mailanddoa littlelightWebbrowsing
