February 7, 2005

Excerpts: Blue Ocean Strategy - Part II

By: 800-CEO-READ @ 3:49 PM – Filed under: Management & Workplace Culture

Strategic Pricing

We have developed a tool called the price corridor of the mass to help managers find the right price for an irresistible offer, which, by the way, isnt necessarily the lower price. The tool involves two distinct but interrelated steps.
Step 1: Identify the Price Corridor of the Mass
In setting a price, all companies look first at the products and services that most closely resemble their idea in terms of form. Typically they look at other products and services within their industries. Thats still a necessary exercise, of course, but it is not sufficient to attract new customers. So the main challenge in determining a strategic price is to understand the price sensitivities of those people who will be comparing the new product or service with a host of very different-looking products and services offered outside the group of traditional competitors.
A good way to look outside industry boundaries is to list products and services that fall into two categories: those that take different forms but perform the same function, and those that take different forms and functions but share the same over-arching objective.
Different form, same function. Many companies that create blue oceans attract customers from other industries who use a product or service that performs the same function or bears the same core utility as the new one but takes a very different physical form. In the case of Fords Model T, Ford looked to the horse-drawn carriage. The horse-drawn carriage had the same core utility as the car: transportation for individuals and families. But it had a very different form: a live animal versus a machine. Ford effectively converted the majority of noncustomers of the auto industry, namely customers of horse-drawn carriages, into customers of its own blue ocean by pricing its Model T against horse-drawn carriages and not the cars of other automakers.
In the case of the school lunch catering industry, raising this question led to an interesting insight. Suddenly those parents who make their childrens lunches came into the equation. For many children, parents had the same function: making their childs lunch. But they had a very different form: mom or dad versus a lunch line in the cafeteria.