Art of price cutting
Cutting prices is often a good strategy, says Dan Clark, who worked in brand marketing at Digital Equipment in the mid-to-late 1990s. A general manager thought Digital should raise the price of workstations to hit projected sales figures, Clark says. He argued that lower prices would increase sales volume enough to hit the dollar goal.
"I had pretty good evidence that there was elasticity in the pricing. The general manager thought pricing was inelastic," Clark says. "We won our argument by saying 'why don't we just sell one workstation for US$1 billion?'"
After a price cut of 30 percent, Digital's workstation sales nearly tripled, moving the division from fifth to third in market share, according to Clark.
"You can create a pricing model that fits your own internal business objectives, but has nothing to do with the reality of the customer, and you've failed," he says.
Clark is now vice president of marketing at Lockdown Networks, which sells network access control appliances.
More than 60 percent of customers find that network vendor pricing structures are confusing, Network World finds in a new poll. Lockdown has tried a relatively simple pricing model, charging a flat fee of US$25,000 for its appliance, while some appliance vendors will charge for the appliance itself, as well as per-user software costs, Clark says.
Lockdown's simple price structure is based on slightly more complex reasoning, however. The vendor figures customers usually pay between US$25 and US$100 to protect and maintain each desktop with antivirus software, Windows updates and patch management.
Lockdown's appliance targets enterprises with 500 to 1,000 users, so at US$25,000 the per-user cost is typically between US$25 and US$50.
"It seems to be pretty on the mark for what people think the value is," Clark says. "We don't often get into intense negotiation for cost per user."
The other major pricing issue is maintenance and support. Clark says Lockdown typically charges 25 percent of product cost for support, more than the industry's 15 percent to 18 percent. Lockdown says that it offers better-than-average value because it provides updates twice a day.
