Smart Phone Pricing and Distribution Channel Analysis

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.

Legal and Ethical Issues of Pricing Tactics

The unethical and illegal traps marketers at times fall into with regard to pricing decisions include pricing fixing, price discrimination, and predatory pricing. All of these practices are often the result of companies facing severe price competition and a lack of product differentiation to the feature level. Choosing a value-based pricing strategy can help to alleviate the circumstances that lead marketers to engage in price fixing with competitors or engaging in price discrimination. Predatory pricing often occurs in those areas of very inelastic markets where competitors are potentially losing gross margins and profits per sales and all that is left to differentiate on is price. A value-based pricing strategy, combined with audits of payments to alliance partners, distribution channel members and outside sales rep organizations can do much to alleviate the potential for these situations to occur. Further steps include defining a series of metrics and key performance indicators (KPIs) t9o measure the effects of each pricing tactic and report back the revenue implications to accounting for auditing. The use of Market Development Funds (MDF) for motivating resellers to stock new products is often a source of funds used to subsidize price fixing. Having a series of audits in place to capture exactly what happens with the funds on a per transaction basis can do much to alleviate the potential for illegal and unethical activity.

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.