Bonnie Gloris: How Stuff Gets Cheaper

The article Pricing New Products, by Michael V. Marn, Eric V. Roegner, and Craig C. Zawada, describes the various methods for setting the price for your innovation, at a time when consumers are “demanding more for less”. The incremental approach uses existing products as a reference point – which may be close to the optimal price for “me-too” products and evolutionary products. A broader view is necessary for products that have few comparables – a price ceiling may need to be established based on the product’s benefits. 

Creating a Marketing Plan: An Overview, from Marketer’s Toolkit: The 10 Strategies You Need to Succeed, also expounds on the complexities of pricing – if you price too low, your unit sales will increase, but your profits will decrease; too high, and your sales will decrease as customers opt for your competitors. The article recommends pricing for your objective (to increase unit sales? profits? market share? etc.) and designing products with your price targets in mind.

What if you’ve done your market research, set the optimal release price, and then… you get undercut? Planet Money’s podcast How Stuff Gets Cheaper (http://www.npr.org/blogs/money/2014/11/28/366793693/episode-586-how-stuff-gets-cheaper) explains exactly how this might happen. They profile a company called Monoprice, which takes popular products and figures out how to make them for less. The Monoprice warehouse, which is the size equivalent of three football fields, includes a test lab/playroom where tinkerers dismantle electronics and investigate if they can be tweaked to be made cheaper and (sometimes) better.

A fancy Apple brand monitor, for example, originally retailed at around $1,000, but by investigating the source of its component panels (a factory in Korea), Monoprice was able to offer a remake for $425.99. A few years later, about five companies are offering a similar monitor, so the monitors continue getting better, and continue getting cheaper – which equals more price competition. The product has moved from the category of being too expensive, into the category of being a good deal. The price of the monitor is now pretty close the cost of production.

As an entrepreneur, what are your thoughts on how to stay ahead of the price-cutting race? Or do you imagine yourself on the other side of the fence – tweaking existing products to come up with a cheaper alternative?