February 9, 2005

Excerpts: Blue Ocean Strategy - Part IV

By: 800-CEO-READ @ 2:52 PM – Filed under: Management & Workplace Culture

Step 2: Specify a Level Within the Price Corridor
The second part of the tool helps managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services. That assessment depends on two principal factors. First is the degree to which the product or service is protected legally through patents or copyrights. Second is the degree to which the company owns some exclusive asset or core capability, such as an expensive production plant, that can block imitation. Dyson, a British electrical white goods company, for example, has been able to charge a high unit price for its bagless vacuum cleaner since the products launch in 1995, thanks to both strong patents and hard-to-imitate service capabilities.
Many other companies have used upper-boundary strategic pricing to attract the mass of target buyers. Examples include DuPont with its Lycra brand in specialty chemicals, Philips ALTO in the professional lighting industry, SAP in the business application software industry, and Bloomberg in the financial software industry.
On the other hand, companies with uncertain patent and asset protection should consider pricing somewhere in the middle of the corridor. As for companies that have no such protection, they must set a relatively low price. In the case of Southwest Airlines, because its service wasnt patentable and required no exclusive assets, its ticket prices fell into the lower boundary of the corridornamely, against the price of car travel. Companies would be wise to pursue mid- to lower-boundary strategic pricing from the start ifany ofthe following apply:
  • Their blue ocean offering has high fixed costs and marginal variable costs.

  • Their attractiveness depends heavily on network externalities.

  • Their cost structure benefits from steep economies of scale and scope. In these cases, volume brings with it significant cost advantages, something that makes pricing for volume even more key.

  • The price corridor of the mass not only signals the strategic pricing zone central to pulling in an ocean of new demand but also signals how you might need to adjust your initial price estimates to achieve this. When your offering passes the test of strategic pricing, youre ready to move to the next step.