NORTH- H O L L A N D

Pricing an Industrial
Technological
Innovation:
A Case Study
What Decision Do You Recommend:
Skim?, Penetration?, or Price Parity
with an Older Technology?

Arch G. Woodside
The manufacturer of a new fencing wire wanted to know if he
should price the wire more than, equal to, or less than a larger
competitor's product when introducing the new product to customers. Compared to the competitor's product, the new fencing
wire was manufactured using a unique technology and component materials. The physical and performance properties of the

new product offered substantial benefits to customers in landbased industries (e.g., sheep stations and cattle range operations). In the case study, three alternative pricing strategies were
proposed by three different senior managers. Which pricing decision would you recommend? A discussion of the likely effectiveness of each of the three alternatives is appended.
The case study was based on a fieM study of marketing new
technologies in New Zealand. The descriptions of the new and

Address correspondence to Arch G. Woodside, A. B. Freeman School of

Business, Tulane University, New Orleans, LA 70118.

competing product technologies, and the events presented in the

case, are factual.

Industrial MarketingManagement24, 145-150 (1995)

Elsevier Science Inc., 1995
655 Avenue of the Americas, New York, NY 10010

0019-8501/95/$9.50
SSDI 0019-8501(94)000-33-S

Pricing problem is acute for new

technology product.
INTRODUCTION

Kotler [2, p. 489] emphasized that pricing is a problem

when a firm has to set price for the first time. The problem
is acute when pricing a product manufactured using a new
technology with new component materials unfamiliar to
customers, and when these customers are satisfied with
their experiences in using the existing product offerings,
Three general solutions are possible: (1) pricing the new
product noticeably more than the competitors' who dominate in the marketplace (a price skimming strategy), (2)
competitive parity pricing, and (3) pricing the new product noticeably less than the dominant competitor's product (a marketing penetration pricing strategy). In the case
study described in this article, three different executives
were working together on planning and implementing the
market launch of a new industrial product; each executive
advocated the use of a different pricing strategy. All major
details in the case study are factual; some information is
included that supports each of the three strategies,
A discussion of the merits of each pricing solution is appended. You are asked not to read the appendix until after
reading the case study and ticking ( , / ) one of the alternatives at the end of the case. After ticking your recommendation, please consider writing a defense of one or more
sentences of your recommended solution in the space
provided. Whereas no one solution may be best, the appendix includes my ranking of the likely effectiveness of
the three solutions.

FENCING WIRE INDUSTRY IN NEW ZEALAND

The fencing wire industry in New Zealand consisted of
two major suppliers: the Steel Wire Company and the Kiwi
Fencing Company. (Whereas the basic information in this

case is based on real-life events, all names of persons and

firms mentioned in this case are fictitious, and several details of the case have been disguised.)
The Steel Wire Company supplied traditional, galvanized
steel fencing wire; Steel Wire had approximately 95 % of
the "traditional" wire market share. Kiwi Fencing supplied
"electrified" plastic stranded fencing wire and has approximately 80 % of the electrified wire market share.

Customers and Marketing Channels

The largest end users of both wires were enterprises in
land-based industries (e.g., the agricultural sector), and
the wires were distributed to this sector by the two compariles through merchant resellers and agent middlemen. Most
agricultural equipment distributors in local agricultural
areas stocked wiring from both Steel Wire and Kiwi Fencing; about half of the agent middlemen representing Kiwi
Fencing also represented Steel Wire. The agent middlemen did not take legal title to products; these middlemen
represented product lines of noncompeting principals. Principals were manufacturers who preferred to use agent middlemen instead of developing and managing their own sales
force (a "direct" sales force).
Agent middlemen were paid on a commission-only basis; they were not paid for their marketing expenses by their
principals. The sales commissions of"manufacturing reps"
must be substantial enough to cover the agent's marketing
expenses and produce profits.
Competition between the two wiring manufacturing companies was limited because of the different product uses.
The traditional galvanized fencing wire was primarily used
for permanent boundary fences, subdivision of large paddocks, trellis systems, and other similar types of permanent fence construction. In contrast, the electrified plastic
stranded wire was primarily used for temporary internal
barriers in break feeding, intensive grazing, or in conjunction with permanent galvanized wire as an inner barrier.

ARCH G. WOODSIDE is the Malcolm S. Woldenberg Professor

of Marketing at the Freeman School of Business, Tulane

In the mid 1970s when K i w i Fencing started to distribute its fencing on a national basis, Steel Wire informed the

University, New Orleans.

agents representing the Steel Wire products line that Steel

Wire viewed Kiwi Fencing as a competitor and that Steel

146

Customers prefer to buy locally

through distributors.
Wire preferred that its representatives did not represent Kiwi
Fencing. Most of Steel Wire's representatives agreed to not
represent Kiwi Fencing. However, by the early 1980s many
of Steel Wire representatives were carrying the Kiwi Fencingproduct line because many oftheir customers (bothdistributors and farmers) asked about the product and were
buying Kiwi Fencing products as well as Steel Wire fencing. Although Steel Wire had threatened to drop any agent
who started to carry Kiwi Fencing, Steel Wire had not
done so.
Kiwi Fencing was able to develop a national manufacturing rep marketing channel between 1973 to 1978. The
sales manager, Steve Dakin, and assistant sales manager,
Bob Hamilton, each invested about 50 % of their time with
agents jointly calling on distributors and medium to large
farmers and sheep/cattle station managers. (Mr. Hamilton
and Mr. Dakin tried to coordinate their schedules so one
of them would be at Kiwi Fencing's manufacturing plant
to "cover the phone" Ten to 20 reps, distributors, and/or
farm/station managers would call per day with questions,
problems, and requests for quotations.)

Buying Behavior of Customers

Almost all farmers and station managers wanted to buy
locally through distributors for repeat purchase items,
whenever possible. These customers did not want to tie
up their operating funds in equipment inventory. The
farmers and station managers expected that "their local distributor" would carry a wide range of equipment and have
the equipment available locally when needed. Usually the
farmers and station managers would travel in their own
trucks to local distributors to buy and transport equipment,

PLASWIRE: A NEW KIWI FENCING PRODUCT

By early 1990 Kiwi Fencing wanted to be competing
nationally in the traditional galvanized steel fencing market with a new type of permanent fencing wire that Kiwi
Fencing intended to manufacture in New Zealand. The
product, Plaswire, was a plastic wire made from polyeth-

ylene terephthalate and was designed to be used as replacement for galvanized steel wire in permanent fencing construction.

Features and Benefits of the New Product

Plaswire has the following product features:
1. High tensile strength-compatible breaking strength
with steel wire
2. Lightweight-approximately 17 % of the weight of
steel wire in the same gauge
3. Durability- no significant change in tensile strength
from ultraviolet rays, no degradation from agricultural chemicals, tantalized fenced posts, or oxidation from water or salt contact, fire retardation
4. Resistance to temperature extremes- original tension maintained in extreme heat or cold with no brittleness occurring in freezing conditions
5. Handling ease and tight knot performance- special
flexibility for handling ease and no movement at the
knot point, no special straining equipments or tools
required
6. Minimum elongation-large Young's modulus of
elasticity for minimum elongation
7. High ultimate yield point-ability to be restrained
after permanent wire stretch occurs at lower yield
points
8. Choice of colors- high visibility for trellis systems,
pathways, and other areas where visibility is required
9. Ability to be "barbed'- no rust or corrosion from
surface nicks when barbed
10. Strength against bending-endures 360 bending
without breaking
Kiwi Fencing currently enjoys the prominent position in
the "electrified" fencing market with significant brand loyalty from distributors, farmers, and station managers. The
introduction of Plaswire into its product line would position Kiwi Fencing in direct competition against Steel Wire.
Customer attitudes toward the traditional galvanized steel
wire supplied by Steel Wire indicated strong positive product
associations arising from the historic use of steel wire on

147

President Gurney believes the competitor

will not react.
New Zealand farms. However, irregular supplies to resellers
and agent middlemen, recent product price increases, and
shorter product life from corrosive reaction with chemicals suggested changes may occur in customer attitudes
toward galvanized steel wire.
In order to compete effectively, Kiwi Fencing intends
to offer a complete permanent fencing product line, including plain, barbed, and lacing wire, wire netting, and wire
chain link netting.

President's Solution: Penetration Pricing

The president of Kiwi Fencing, Peter Gurney, has requested Bob Hamilton to implement a pricing strategy for
Plaswire that will help achieve national distribution. Mr.
Gurney believed that pricing Plaswire substantially lower
(30% less) than Steel Wire's prices would help gain distributors' acceptance of the product, because some farmers
and livestock station managers may be sensitive to a low
price level of the new product. Mr. Gurney felt certain that
Steel Wire's management would not respond by lowering
its prices in response to a low introductory price on
Plaswire, because the cost of galvanized steel raw material
for manufacturing Steel Wire products was 300 % higher
than plastic raw materials used for manufacturing Plaswire.
A low pricing strategy for Plaswire would produce an estimated net profit-to-sales ratio of 25 %; an estimate substantially more than the 20% target objective for the new
product,

Assistant Sales Manager's Solution:

Competitive Parity Pricing
Bob Hamilton was responsible for recommending a final
pricing decision. He knew from looking at many pricing
lists of industrial distributors of agricultural products that
when manufacturers introduced new products at retail prices
much lower than competing products, their competitors
responded most of the time (three out of four cases) with
price reductions that matched or more than matched the
new products' prices; the final result was failure or very
low market share for new products (failure or very low market share in 92 of the 96 cases Mr. Hamilton was able to

1411

find where a new product was introduced with a lower price

than competing products and the competitors reacted by
lowering their prices).
However, Mr. Hamilton also knew Mr. Gurney often had
predicted correctly whether or not Steel Wire would decrease its prices when Kiwi Fencing offered a lower price;
Mr. Gurney had been correct in his predictions in two of
three recent cases.
Mr. Hamilton favored pricing Plaswire to match the price
of competing Steel Wire products. This pricing strategy
would guarantee a very substantial return on the financial
investment in developing and marketing Plaswire, and Kiwi
Fencing would be likely to gain a "meaningful" share of
the market for permanent boundary fences, assuming that
Steel Wire did not lower its prices.

Sales Manager's Solution: A Skimming

Pricing Strategy
Mr. Dakin recommended pricing Plaswire 10 % higher
than the price of competing Steel Wire prices. He felt that
few agricultural customers would buy the new permanent
boundary wire because of a low price, and Steel WLrewould
lower its prices to match or beat the price of Plaswire. He
noted that in most cases since 1985 (cases in industrial distributors' records) of new product introductions with prices
higher than competitors' prices on existing products, only
one in ten competitors reacted by lowering the price on
an existing competing product. The new products were still
available for most of the other nine products introduced
at prices higher than existing competitors' prices.

YOUR PRICING SOLUTION FOR MARKET

INTRODUCTION OF THE NEW
FENCING WIRE, PLASWlRI:
Given the following options, what pricing decision would
you select? Please tick ( , / ) one solution in one of the three
spaces provided.
1. ( ) Mr. Gurney's penetration pricing solution should
be followed: price Plaswire 30% lower than the prices
of competing Steel Wire products.

F o c u s o n g a i n i n g a n a d e q u a t e return
on investment.
2. ( ) Mr. Hamilton's competitive, parity pricing solution should be followed: price Plaswire to equal the
prices of competing Steel Wire prices,
3. ( ) Mr. Dakin's price skimming solution should be
followed: price Plaswire 10% higher than the prices
of competing Steel Wire products.

of a competitor reacting by lowering price in response to

new competitor's product, P(R), based on some new or
additional knowledge. Bayes' Theorem applied to this case
study:

Please offer a brief defense of your choice (and why the

other two should be selected):

where P(R) is the baseline likelihood of a reaction, .75

P(R)P(SNR/R)

P(R/SNR) =

P(SNR)

P(SNR/R) is the likelihood of predicting a reaction will

not occur, "stating not a reaction," given a reaction does
occur, that is, Mr. Gurney predicts a reaction will not
occur and he is wrong; his recent accuracy is two of three
cases, thus P(SNR/R) = .33
P(SNR) is equal to:
P(R) P(SNR/R) + P(NR) P(SNR/NR)

APPENDIX

(.75) (.33) + (.25) (.67) = .415

to the K i w i F e n c i n g ( P l a s w i r e )
Case Study

thus: P(R/SNR) -

Solution

1. Follow Mr. Gurney's penetration, pricing solution. This

choice is the NOVICE-MARKETER Solution. The baseline evidence (three of four cases, or 75 %) of competitors
reacted by lowering prices when a new competing product
was introduced at a lower price should be a prime factor
in making a pricing decision. Even if this estimate was adjusted to account for Mr. Gurney's prediction that Steel
Wire would not react, the likelihood is still more than 50 %
that Steel Wire would lower its prices. Such a reaction by
Steel Wire is likely to result in market failure for Plaswire.
The major error in predictive judgment is to treat each
case as unique. Although every future event is, by definition, u n i q u e - t h a t is, it has never occurred b e f o r e - m o s t
events can be considered to belong to a "reference class"
[1], about which much is known. Singular data (e.g., Mr.
Gurney's prediction) should be modified by baseline data.
In this situation, Bayes' Theorem (or rule) would be used
to estimate the likelihood of Steel Wh-e responding by lowering the price on products competing against Plaswire. Bayes'
Theorem [see 3, pp. 153-160] is an equation that revises
the probability of an event, for example, the probability

.2475

.596

.4150

The likelihood is .596 that Steel Wire will react by lowering its price if Plaswire is introduced at a price lower than
Steel Wh'e's current prices, based on both the base-line (reference class) data and the singular data of Mr. Gurney's
accuracy and prediction of the future.
2. Mr. Hamilton's solution of pricing Plaswire's price
to equal competing Steel Wire prices. An alternative more
likely to be effective than the penetration pricing solution,
because a price reduction by Steel Wire to a perceived threat
would most likely cause failure for Plaswire, Kiwi Fencing should adopt the less dangerous action.
3. Mr. Dakin's price skimming solution. The MASTERMARKETERs solution. Mr. Dakin's recommendation is
most likely to be successful in not provoking a price reduction of competing Steel Wire products. Agricultural customers are likely to be sensitive to substantial price reductions offered for products these customers are using
currently, but not to new products. The new plastic boundary wire is a new product for which agricultural customers
have not personal (singular data, again) evidence that the
new product will perform as claimed.
149

The strategy for introducing Plaswire boundary fencing

should focus on gaining an adequate return on the development and marketing investment and n o t gaining a specific
market share objective nor national distribution. Kiwi Fencing needs to identify a few (three to five) of their current
manufacturing reps who would be enthusiastic about marketing Plaswire; most likely reps not currently representing Steel Wire. "Field trials" need to be accomplished with
cooperating farmer and station managers to offer evidence
that the new boundary wire actually performs well. In such
field trials the cooperating agricultural customer agrees to
use the product without paying for the product until the
end of an agreed upon test period. Such "innovator" agricultural customers usually are younger, well-educated, economically successful, and l e s s active than other agriculrural customers in trade associations.

New Product Pricing Decision Checklist

Whereas intuition based on experience and insight is helpful, it is not sufficient for pricing products developed from
new technologies competing against a large installed-based
product based on an older technology. The new product,
pricing strategist in such situations may benefit from seeking answers from multiple sources to the following brief
checklist of questions:
CUSTOMER PRICE SENSITIVITY? How do different customers, and different segments of customers, respond to
different price points (assigned to the new product) in terms
of the share of their available business they will award to
the new product versus the existing products they are buying? For the new product, are customers more or less sensitive to different price points compared to changes in levels/configurations of other features and benefits? Using
research methods that include asking a few customers to
hypothetically make such concrete choices is useful in answering these questions; for example, hybrid conjoint analysis provides useful estimates of how customers will respond to different price points for new versus existing
products [see 4].
COMPETITORS' RESPONSIVENESS TO DIFFERENT

PRICE

Moore and Pessemier

[5, p. 201] note that "the magnitude of the [competitors']
response is likely to be proportional to both the degree of
injury or the extent of the opportunity an action provides
and competitors' capacity to respond" Determining competitors costs is helpful but not good enough in answering
POINTS FOR THE N E W PRODUCTS?

150

this question; the new product pricing strategist should

search for information on how specific competitors have
responded to such threats in recent years. The competitors
may be willing to sustain losses for several months or years
if such a strategy will work to prevent successful market
entry of the new product.
DOESTHE RECOMMENDEDPRICE COVER FULL COSTS AND
"NORMAtYPROFITS? Products created using new (often
electronic-based) manufacturing technologies often result
in the counterintuitive combination of higher performance
and conformance quality and lower operating costs for both
the new product marketer and customer. Consequently, a
wide latitude may occur of acceptable price points relative
to the prices of existing products based on the older technology. Thus, pricing the new product at 50%, 70 %, or
90 % of the competitors' prices may each result in acceptable projections of new profit. However, the new product
strategist needs to prepare proforma, financial spreadsheet
analysis of different estimated demands and for different
levels of competitors' responsiveness, for example see
Clarke [6].
PRIMARYPRICINGOBJECtiVE? Does the new product marketer want to avoid or start a price war? Is achieving a posirive cash flow in year one a priority? Is a 30 % market share
by year 3 the top objective? Answers to such questions need
explicit consideration in pricing new products created from
new technologies. Such questions and answers should be
reviewed for different scenarios of customers' and competitors' sensitivities to new product pricing and different costs
and net profit estimates. Using such sophisticated "what
if" analysis leads to wisdom and sound pricing decisions.

REFERENCES
1. Kahneman, D., and Tversky, A., IntuitivePrediction:Biasesand Corrective Procedures, in TIMS Studies in Management Science, S. Makridakis
and S. C. Wheelwright, eds., 12, 313-327 (1979).

2. Kotler, Philip, Marketing Management. Prentice-Hall, Englewood Cliffs,

New Jersey, 1994.
3, Oltman, Debra Olson, and Lackritz, James R., Statistics for Business and
Economics. Brooks/Cove, Pacific Grove, California, 1991.
4. Woodside, Arch G., and Pearce, William G., Testing Market Segment Acceptance of NewDesignsofIndustrialServices,Journal of Product Innovation Management 6 185-201, 1989.
5. Moore, William L., and Pessemier, Edgar A., Product Planning andManage-

ment. McGraw-Hill,New York, 1993.

6. Clarke, Darral G., Marketing Analysis and Decision Making. The Scientific
Press, RedwoodCity, California, 1992.