Value-based skimming pricing strategy for new smartphone market entry

Smart Phone Pricing and Distribution Channel Analysis

The pricing strategies and tactics of innovative products including smart phones more effectively and clearly define their position in a market compared to another other strategy including marketing and advertising (Piercy, Cravens, Lane, 2010). The decision to pursue a specific pricing strategy will have a long-term impact on how the value of the smartphone is perceived by customers, and will also impact how elastic a potential new market is. Due to all of these factors over and above covering costs and ensuring a sufficient gross margin for profitability, pricing is the most strategic of marketing strategies there are (Marn, Roegner, Zawada, 2003). The intent of this analysis is to present a pricing strategy for a new smart phone, determine and discuss pricing tactics for the phone, and identify any legal and ethical issues related to the chosen pricing tactics. In addition, marketing distribution channel analysis and how the distribution strategy fits with the product, services and overall marketing objectives of the company are assessed.

Defining a SmartPhone Pricing Strategy

In creating a pricing strategy, the objectives of defining value-based differentiation in the smartphone market needs to be addressed, in addition to evaluating the pricing strategy based on competitive forces in the market. Choosing a value-based, skimming strategy is recommended based on the analysis completed in this section. Value-based pricing with a price premium is the most effective strategy as it will first position the smartphone in an area of the market where commodity-producing market dynamics aren't as prevalent (Piercy, Cravens, Lane, 2010). Pricing above the area of the market where price wars dominate vendor marketing strategies not only saves gross margins and profitability, it saves brand value too. Choosing a value-based pricing strategy that skims the top of the market will ensure the new smartphone isn't shopped on price and availability alone, further distancing the new product from commodity-driven selling.

Value-based pricing that supports a skimming strategy will also attract an entirely different segment of customers than competitors who complete on price alone (Allsopp, 2005). This is evident from how successful Apple is with the iPad and iPad2 series of tablets, where their value-based pricing continues to be very successful in attracting a new customer segment to the company (Piercy, Cravens, Lane, 2010). A skimming strategy keeps devices solidly positioned at the higher end of the market, where elasticity is greater and there is less of a focus on feature-to-feature competition and more on value (Marn, Roegner, Zawada, 2003).Even in inelastic areas of the smartphone market, pricing above the median level will further communicate value and create differentiated positioning. Apple's iPhone and iPad pricing are managed according to these guidelines, as is clear from their position and strength in their chosen market segments and profitability attained.

Defining Pricing Tactics for a Smart Phone

In defining the series of tactics for pricing a new smart phone, competitive and market forces need to first be taken into account, followed by the aligning of the tactics to the broader strategic plans and goals of the company. In order to fully capture the competitive and market forces influencing smartphone pricing globally, Porter's Five Forces Analysis has been used to analyze this market. Figure 1 provides an overview of these five forces as captured in the Porter Five Forces Analysis framework.

Figure 1: Porter Five Forces Analysis Framework of the Smartphone Industry

Sources: (Porter, 2008) (Poe, 2005) (Romero, 2011)

This analysis indicates that the current smartphone industry is one that is experiencing rapid economies of scale in manufacturing, supply chain, sourcing and distribution channel dynamics. It also indicates that buyers (or customers) and their purchasing habits are a strong catalyst of continual change and growth in the product lifecycles of smartphones today. A smartphone marketer or manufacturer seeing this would quickly resort to a penetration marketing strategy to quickly gain market share, hoping to "lock in" customers with service agreement and long-term service contracts. That strategy would be very risky and unprofitable over the long-term as the smartphone itself would quickly turn into a commodity. A better strategy would be to interpret the Five Forces Model and seek to create a series of pricing tactics that further position and strengthen the smartphone as a platform, not just a device. Pricing tactics that stress high-end value and benefits and the pervasive use of bundling can lead to greater customer loyalty over the long-term (Romero, 2011). Choosing bundling, special promotions that underscore the platform-like aspects of the smartphone, and creating pricing strategies that attract entirely new customer segments including mobile professionals are critically important. All pricing tactics need to underscore the need for communicating value as a platform and pervasive communications device first, with the series of applications supported and available due to the decision on using the Android operating system being mentioned second.

Marketing Distribution Channel Analysis

In defining the distribution strategy for the smartphone, the roles of the wholesaler, distributor and retailer are defined in the context of a marketing distribution channel analysis. Next, the product and service strategy, target market and marketing objectives are defined in the context of the distribution channel framework. Figure 1 provides an overview of the proposed distribution channel analysis.

Figure 1: Proposed Distribution Channel Analysis

It is essential to have a multi-channel-based distribution strategy for any product to succeed, as a single channel only reaches a small percentage of a given audience (Chun, Rhee, Park, Kim, 2011). Today buyers shop across multiple channels to learn more about their products of interest, and second, to buy from whom they are most loyal to. Buyers in the smartphone market are driving rapid innovation into the distribution channel strategies of marketers and manufacturers.

In launching the new smartphone, electronics distributors, mass merchandisers, big box retailers including Target and consumer direct sales via the Web are the initial channels. The selling relationships with each of these channel partners' needs to be aligned to their innate strengths as members of the distribution channel network. With electronics distributors the potential exists for them to customize the smartphone with their own applications to penetrate new vertical markets. In addition, electronics distributors will finance the sales into specialty retailers. The mass merchandisers including BestBuy will need a staff of training and support personnel to get their hundreds of stores up to speed on the new product. Customized training materials online will also be needed. Big box retailers including Target and the direct sales channel via the Web will need to have preconfigured solutions with a minimal amount of customization and configuration required. All of these information needs by channel need to be aggregated together into a global channel distribution strategy and automated as needed through Intranet portals and programs. These programs will also indirectly protect the company from price competition by competing on value.