Pricing Against a High-End Product

In StrategyStreet terminology, a Standard Leader is a company who sells the majority of its products at the most common industry price point. The most common product we call the Standard Leader product. At the high end of the market are those companies who offer products with extra features and services for prices starting about 10% higher than the Standard Leader product. We call those companies, and their products, Performance Leaders. In the personal computer industry, Apple is a Performance Leader; Dell and Hewlett Packard are Standard Leaders.

Apple introduced its Mac-Book Air laptop early in 2008. This was an ultra-thin machine that appealed to customers who wanted light weight and high style in their personal computer.

Somewhat later in the year, Hewlett Packard introduced its high end Voodoo Envy laptop. This is an example of a Standard Leader company introducing a Performance Leader product in competition with a Performance Leader company. (See the Symptom and Implication, “Customers are taking on more suppliers because shortages have appeared” on StrategyStreet.com.) This happens in most industries. Recently, Dell has announced its Adamo high-end personal computer. Dell claims the Adamo is the thinnest and the most stylish in the market. These three Performance Leader computers sell strictly on style. Their technical specs are not much different from other laptops, or from one another.

There is something interesting, though, in the way the computer industry Standard Leaders have priced their products against the Apple computer. The Apple Mac-Book Air sells for about $1800; Hewlett Packard’s Voodoo Envy sells for $1900; and Dell’s Adamo sells for $2000. The Standard Leader products carry prices above the price of the Mac-Book Air, the leading Performance Leader product.

This is an unusual approach to pricing. The Standard Leaders would like to take market share from Apple but they have given up one of their most powerful advantages, their low costs due to Economies of Scale and, potentially, lower prices. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.) A more robust approach is for the Standard Leader to use its superior economies of scale and distribution power to introduce a product somewhat below the price of the Performance Leader product. This enables the Standard Leader to introduce a product that will take share from the Performance Leader, slowing its growth and reducing its margins. Consider these examples of that pricing strategy.

* Toyota introduced the Lexus brand against Mercedes Benz at a price point of $39,000 compared to an average $50,000 Mercedes Benz price.

* MSN priced its broadband product at $39.95 to compete against AOL’s broadband at $44.95.

* The Palm PDAs competed against PDAs using Microsoft’s Pocket PC operating system at prices 20% or more below the pocket PC-driven machines from Compaq and Hewlett Packard. Then, smartphones undercut PDAs.

* Schwab’s 2% cash back credit cards carried no annual fees in competition with fee-bearing airline miles credit cards.

* McDonalds and Dunkin Donuts introduced high-end coffee drinks at prices nearly 50% below those of an equivalent drink at Starbucks.

* Kraft’s DiGiorno high-end frozen pizza came out at a price of $5.59 to compete against home delivery pizza at around $7.00.

My guess is that neither the Hewlett Packard nor the Dell high-end computer will have any impact at all on Apple and its Mac-Book Air.