Segment products and markets with pricing walls
One of the greatest problems in marketing is effectively communicating the differences between products so that they are clear in the customer’s minds. Pricing provides one of the most effective ways to do this. The purpose of the walls is to channel customers appropriately to the right products. Customers are often confused about the different tiers of a market. They seldom see differences clearly. Few things bring more clarity to product differences, and hence market segments, than pricing. If you use the concept of walls in your pricing strategy, you will bring clarity to the market. But beware: Competitors can tunnel through them.
The classic example is how General Motors differentiated each of its brands with clear price tiers that could not be violated between divisions. The difference between a Chevrolet and a Cadillac was minimal: Leather versus cloth in the interior, a little better radio, etc. All of which, added up to a cost difference of less than ten percent. But, because of the price tiers between Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac. A Cadillac sold for about twice the price of a Chevrolet. So, while they were profitable on Chevrolets, they were very profitable on Cadillacs. One of the company’s seeds of destruction was that it forgot this maxim with successive management changes.
Now come forward to the early days of the semiconductor industry. Fairchild faced a similar problem then, which when solved has been a boon to the industry ever since. Every time it made a wafer (and it’s still the case today) there were good transistors and bad transistors. But among the good there were differences in performance that were not only seen by the tester, customers could see them as well. Some parts were marginal, some O.K., others really good, and a few were great.
Now this may sound silly today, but they were all priced the same. Management argued that since they cost the same to make, they should be priced the same. Doing anything different would be usury (remember back then, the industry’s leadership was heavily populated with fairly religious young Midwestern farm boys, who had graduated from some of the country’s best technical universities that had taught them to look on marketing as something akin to cleaning out a pig stall). Of course, manufacturing complained that binning parts would be too difficult, so they were strongly in favor of flat pricing as well.
The problem was, they were scrapping perfectly good parts that couldn’t be sold because customers wanted only the best ones. Bob Graham, then a young guy who had just entered sales and marketing, was arguing for value-based pricing based on tested performance. It almost got him fired, but he finally got to try his way. Immediately, all the parts were clearing the market and profits soared. This simple marketing innovation helped propel Fairchild to the top.
Teradyne came to dominate SOC testing in the nineties with excellent pricing walls set around its Flex, Catalyst, and Tiger systems. Tiger was a higher priced extension of Catalyst, while Flex was a completely different architecture that could be built for much lower cost. Having these tiers was very important, because when customers tried to pit a lesser tester against the Tiger to get a lower price, Teradyne could switch them to their lower tiered tester that was comparable on performance. That put the price battle on a lower plane, with a wall isolating the buyers from the ultimate users. With pricing settled, the people in manufacturing usually convinced management they needed the higher-end Tiger. Hence, Teradyne had created a pricing wall that not only segmented the market . . . it ensured profitability.
By G Dan Hutcheson
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