"Build A Better Mousetrap" Is No Claptrap
When Gillette Co. unveiled Mach3, the world's first triple-blade razor, it took a bold gamble. While deflationary pressure was making it impossible for most companies to charge high prices for new products, Mach3 cartridges were to sell for around $1.60 each, a 50% premium over Gillette's then-priciest blade, the SensorExcel. Skeptics predicted the personal-care giant would soon be forced to cut that price. But six months after Mach3 hit U.S. stores, the price is holding and Mach3 has become the No. 1 blade and razor. Gillette had 70.7% of the U.S. market in December, its highest share since 1962.
Most companies would kill for a product with this kind of pricing power. In a new survey by the Financial Executives Institute and Duke University, chief financial officers from all industries said they expect price hikes to average just 1.4% in 1999. Manufacturers say they'll manage a gain of only 0.2%. And some 25% of U.S. companies, in industries from breakfast cereal to autos, will have to cut prices, figures Gary Stibel, a founder and principal of the New England Consulting Group.
REALLY BIG SHOE PADS. But an elite few are bucking the trend by introducing "new products that provide benefits people think are worth paying for," says Gillette CEO Alfred M. Zeien. Colgate-Palmolive Co., for example, priced Colgate Total 25% above mainstream brands because Total is the first paste approved by the Food & Drug Administration to help prevent gingivitis. After a year, Total is the No. 1 brand, with a nearly 10% share. Dr. Scholl's, a unit of Schering-Plough Corp., has taken the lowly shoe-insert pad and used biomechanics to transform it into a remedy for leg and back pain. The new product, Dynastep, sells for as much as $14 per insert, twice as much as older inserts--and since 1997, it has become the No. 1 device, with 29% of the market.
What's the secret to pricing power? For starters, a commitment to innovation. Gillette spent nearly $1 billion on the development and initial marketing of Mach3. Similarly, a stream of breakthroughs allows Sony Corp. to command a premium even for TVs, where prices have been falling. Thanks in part to the Wega, the world's first conventional flat-screen TV, Sony's TV sales rocketed 24% in the first half of its fiscal 1998.
Of course, pricing power is often fleeting. Intel Corp., for one, has had to cut prices of low-end chips as rivals have brought out similar products. But Intel remains "the only game in town" for high-end chips, says Ashok Kumar, senior research analyst for Piper Jaffray Inc. Intel is charging $3,692 for its latest Pentium II Xeon processor--or $3,271 above the production cost, according to MicroDesign Resources. "It's a license to print money," says Kumar.
It also helps to aim products at the affluent. They "are willing to pay a lot more to save time or obtain other significant benefits," says Christopher Hoyt, a marketing consultant in Stamford, Conn. Maytag Corp.'s environment-friendly Neptune washer is a hit among well-off consumers, even though at $1,100, it costs twice as much as conventional washers. Over the course of a year, it uses $100 less electricity than other washers and saves 7,000 gallons of water--as much as a person drinks in a lifetime.
BLITZKRIEG. Even the humble toothbrush has undergone a price-boosting metamorphosis--thanks to aging baby boomers who want to keep their choppers. Gillette's Oral-B Laboratories is betting that it can charge $5--50% more than current top-line rivals--for its new CrossAction brush, due in February. Oral-B claims its unique design will remove 25% more plaque than today's best-selling brush.
The pricing elite also back their products with lavish ad spending. Gillette is sinking $300 million into marketing Mach3 in its first year. Ian Cook, president of Colgate North America, boasts that an "unprecedented" blitzkrieg on dentist's offices made Total "the toothpaste most recommended by dentists and hygienists" in its first four months.
Inevitably, some pricing power champs lose muscle. "Three years ago, Nike was a controlling factor," says Chet James, owner of Super Jock 'n Jill, a Seattle running-shoe store. But thanks to a style shift to brown shoes, a plunge in Asian demand, and Michael Jordan's retirement, "right now, it's not pricing power but buying power" that's at the forefront. In autos, a global capacity glut has meant that "prices have actually gone down," says DaimlerChrysler Co-Chairman Robert J. Eaton.
The message seems clear. While competing on price can work, the success of the pricing elite suggests there may be a better way. "Most companies don't take a bold enough position to invest in the development of superior products that can command a premium price," argues Jeffrey M. Hill, managing director of Meridian Consulting Group. Given the potential rewards, perhaps they should.
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