94-Pricing Against a High-End Product

 

When should a strong Standard Leader competitor allow a lower priced competitor to take share from it. Only under unusual conditions. This industry is not living in unusual conditions. Instead, an industry challenger is using low price to gain share against locally stronger industry leaders. Not a good idea.

Posted 4/6/09

In StrategyStreet terminology, a Standard Leader is a company who sells the majority of its products at the most common industry price point. The most common product we call the Standard Leader product. At the high end of the market are those companies who offer products with extra features and services for prices starting about 10% higher than the Standard Leader product. We call those companies, and their products, Performance Leaders. In the personal computer industry, Apple is a Performance Leader; Dell and Hewlett Packard are Standard Leaders.

Apple introduced its Mac-Book Air laptop early in 2008. This was an ultra-thin machine that appealed to customers who wanted light weight and high style in their personal computer.

Somewhat later in the year, Hewlett Packard introduced its high end Voodoo Envy laptop. This is an example of a Standard Leader company introducing a Performance Leader product in competition with a Performance Leader company (Apple). (See the Symptom and Implication, “Price points are growing at different rates” on StrategyStreet.com.) This happens in most industries. Recently, Dell has announced its Adamo high-end personal computer. Dell claims the Adamo is the thinnest and the most stylish in the market. These three Performance Leader computers sell strictly on style. Their technical specs are not much different from other laptops, or from one another.

There is something interesting, though, in the way the computer industry Standard Leaders have priced their products against the Apple computer. The Apple Mac-Book Air sells for about $1800; Hewlett Packard’s Voodoo Envy sells for $1900; and Dell’s Adamo sells for $2000. The Standard Leader high end products (Performance Leader products) carry prices above the price of the Mac-Book Air, the leading Performance Leader product.

This is an unusual approach to pricing. The Standard Leaders would like to take market share from Apple but they have given up one of their most powerful advantages, their low costs due to Economies of Scale and, potentially, lower prices. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.) A more robust approach is for the Standard Leader to use its superior economies of scale and distribution power to introduce a product somewhat below the price of the Performance Leader product. This enables the Standard Leader to introduce a product that will take share from the Performance Leader, slowing its growth and reducing its margins. Consider these examples of that pricing strategy.

• Toyota introduced the Lexus brand against Mercedes Benz at a price point of $39,000 compared to an average $50,000 Mercedes Benz price.

• MSN priced its broadband product at $39.95 to compete against AOL’s broadband at $44.95.

• The Palm PDAs competed against PDAs using Microsoft’s Pocket PC operating system at prices 20% or more below the pocket PC-driven machines from Compaq and Hewlett Packard. Then, smartphones undercut PDAs.

• Schwab’s 2% cash back credit cards carried no annual fees in competition with fee-bearing airline miles credit cards.

• McDonalds and Dunkin Donuts introduced high-end coffee drinks at prices nearly 50% below those of an equivalent drink at Starbucks.

• Kraft’s DiGiorno high-end frozen pizza came out at a price of $5.59 to compete against home delivery pizza at around $7.00.

My guess is that neither the Hewlett Packard nor the Dell high-end computer will have any impact at all on Apple and its Mac-Book Air.

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Update 2022:

In the laptop and personal computer market, Apple remains a Performance Leader in competition with much larger Standard Leaders.  Apple leads the market for high-end, Performance Leader, laptops. Apple also leads in price. Its competitors now price below them. See HERE and HERE for an explanation.

In 2021, there were 370 million personal computers shipped. Apple owned 8% of that market.  Apple ranked fourth behind Lenovo, HP and Dell. Those top three competitors controlled 64% of the market.  In early 2022, Lenovo led the personal computer market with 23.6% of the market. HP followed at 20.5%. Dell was third at 17.7%. Apple fourth at 9%. The top four competitors controlled more than 70% of the market. The market has gradually consolidated in the last 10 years. In 2012, HP led the market with 17.2% market share. Lenovo followed at 13.1% and Dell at 11%.

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Update 5/26

Let’s begin by checking out what happened to the two high-end personal computers introduced in 2008-09 to compete with Apple. Both products failed against the Apple MacBook Air. Both companies introduced products that did not have performance better than, or even equivalent to, the industry’s high-end leading Apple computer. The HP Voodoo Envy carried a price of $2000 which didn’t fit well with the high-end mass market. It was too much of an expensive niche product without the Apple ecosystem to support the user. The Dell Adamo came out in 2009 priced between $1800 and $2000. It was an ultrathin, ultra-premium laptop with poor performance. It used low – voltage CPUs to keep it thin but that made the product slow. The two companies relied on their brand names, which represent Reliability, to carry their water. However, Reliability does not work until Function is satisfied. Function is higher in the Customer Buying Hierarchy. The companies learned from their mistakes and carried the best Function aspects of these products into their succeeding high-end offerings.

While there have been ups and downs, the personal computer industry has been largely stagnant for the last 15 years. Phones and Tablets have taken most of the growth. Refresh cycles dominate the industry, so growth is cyclical rather than secular. Recent US PC market shares have HP at 26.5%, Dell at 24%, Lenovo at 17.2%, Apple at 12.3%, Acer at 6.8% and a string of others totaling 13.2%. HP and Dell are losing share to Lenovo and Apple. Acer is showing modest gains while the others are shrinking in market share.

Lenovo is the Standard Leader challenger to industry leaders HP and Dell. The latter two companies offer security heavy, managed services platforms (Function and Reliability) to the industry’s Very Large and Large customers at a premium price. They rely on long enterprise relationships. HP and Dell have deep enterprise support organizations, long‑standing corporate contracts, and strong device management ecosystems. Lenovo is challenging with an ergonomic, productivity-optimized fleet with strong repairability and lower total cost of ownership (Function and Price). HP and Dell lead the enterprise market with prices roughly 10% over those of Lenovo. Lenovo is attacking the US market with an aggressive Price Shaver pricing tactic. Even though HP and Dell seek to discourage Lenovo by matching prices on strategic accounts, Lenovo is gaining share in the enterprise market with its pricing and growing reputation. HP and Dell have adopted a Leader’s Trap approach with Lenovo, who effectively sets the price in the enterprise market.

Following a Leader’s Trap pricing tactic against Lenovo is dangerous and likely futile. Lenovo is a larger company in the global personal computer market. In this broader market, Lenovo leads the industry with 26.5% market share. HP follows at 19.3% and Dell at 16.5%. So, Lenovo has greater scale. In the US market, Lenovo’s margins are just slightly below those of its large competitors. It is giving up some margin for market share… playing the long game. It is likely to win that long game because its total cost structure is lower than either HP or Dell. In addition to its scale advantage, it enjoys a lower cost supply chain with Chinese manufacturing and some lower cost critical components.

Over the next few years, HP and Dell will have to match Lenovo’s pricing or watch Lenovo become a dominant player in the enterprise PC market.

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