High-Tech Pricing is Highly Subjective

For new and innovative high-technology products, pricing is an extremely subjective exercise. In the beginning, all the traditional guideposts are missing. The products are new, the markets are new, and the value customers attach to them is in constant flux.

The Challenge of Subjectivity:

No Price-Volume Curve: It is almost impossible to draw a price-volume curve that is more than a crude best guess. No one really knows how price will affect volume for a new-to-the-world product.
Customers are Poor Judges: Even customers are often unable to project accurately what they will be willing to pay until they have completely evaluated a product and been exposed to all of its benefits.
Value is Hard to Quantify: For products that offer productivity gains or faster time-to-market (like CAE equipment), the value to the customer can be so great that almost any price seems too low. The initial price is limited only by the supplier's ability to convince the customer of the product's worth.

The Pricing Process in a New Market:

The Leader Sets the Anchor: The first substantial entrant gets to price on the product's absolute value to the customer, creating an initial price anchor.
Followers Price Relatively: Subsequent competitors then price their products based on their value relative to the first supplier's.
The Market Evolves: Eventually, a competitor will break the rules, a price war will result, and the market will begin to mature.

In the final analysis, the price is right if it permits the company to earn fair profits and achieve its market share goals. It must be set at a point where, with practice, the value can be justified to the customer.