Maximize price...or maximize profits?

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In his book; Marketing High Tech – an insider’s view, William Davidow recounts a great story that illustrates the difficulty in getting pricing right the first time for high-tech products. While the story centers around one of Intel’s earlier products - the 8080 microprocessor - the lessons learned from the experience remain applicable even in today’s environment.

Davidow, at the time a marketing executive at Intel, tells the story with the purpose of illustrating the difficulty of making prudent pricing decisions based on limited information.

“The first really powerful 8-bit microprocessor on the market was Intel’s 8080. It had been preceded by a lower- performance device, the 8008, which initially sold for $36. Since the 8080 had ten times the performance of the 8008 and was probably hundreds of times more useful, I decided the market would, initially, be willing to pay ten times the price. Intel easily sold every 8080 it could make. We recovered the total development  cost of the product in the first two months it was available.”

“ A good pricing decision, right? Wrong! Many customers decided the price of the 8080 would remain high for a long time and so delayed any decision to design the 8080 into their products. In fact, the $360 price was etched so deeply in the customers’ minds that it was extremely difficult to erase. That gave Intel’s competitors, the late entrants into the market, a chance to capture a lot of designs that should have been ours. Yet this obvious problem was never forcefully raised during any of the long discussions at Intel on pricing the 8080. The irony was that the 8080 ultimately sold for just two dollars.”

Pricing decisions involve more than just simple economics - they are complicated decision trees based on incomplete information. In this case, Intel was able to figure out the first dimension of value (what their buyers were willing to pay) but completely missed the secondary dimension ( the significant volume of non-buyers who, scared off by the relatively high price, opted to wait for a lower-cost second-entry product to enter the market). Maximizing price is not the same as maximizing profits - something Intel didn’t forget going forward.

Here’s the takeaway. Use pricing strategy to maximize your profits - don’t just charge what the market will bear. Sometimes you need to lower prices in order to maximize profits.