Keep reading to learn about the blue ocean strategy pricing approach. <\/p>\n\n\n\n\n\n\n\n
Pricing to Maximize the Number of Customers<\/strong><\/h2>\n\n\n\nThe authors say that appealing to as many buyers as possible up front has several advantages over the common practice of starting with a premium price to attract early adopters<\/a> and then gradually lowering prices to attract mainstream customers:<\/p>\n\n\n\n1. Often, appealing to the maximum number of buyers maximizes profits, because in many industries, fixed costs (one-time expenses associated with launching your product) are high and marginal costs (ongoing expenses associated with delivering each unit that you sell) are low, so attracting more buyers will subsidize your fixed costs while not costing you much more per customer. This is particularly true in software and R&D-heavy industries.<\/p>\n\n\n\n
2. Many products benefit from network effects<\/a>, where the value of the service scales with the number of users. <\/p>\n\n\n\n(Shortform note: Reid Hoffman and Chris Yeh devote most of their book Blitzscaling<\/em><\/a> to these two points. They explain how the internet has driven marginal costs to near zero in many cases, and discuss the \u201cfirst-scaler advantage\u201d created by network effects. They point out that by growing quickly from the outset, you can reduce the risk of a competitor gaining this advantage before you do. This reinforces Kim and Mauborgne\u2019s blue ocean strategy of pricing for the masses up front.)<\/p>\n\n\n\n3. Strategic prices help earn a reputation for your brand immediately, making it harder for others to copy your strategy and turn your blue ocean into a red one.<\/p>\n\n\n\n
(Shortform note: According to Ries and Trout<\/a>, market leadership is self-perpetuating in this way. They assert that it is almost impossible to displace a market leader<\/a>, once people view them as such, because brand loyalty drives greater demand and their reputation makes it easier for them to raise capital for expansion and attract the best talent to their workforce.)<\/p>\n\n\n\nHow do you actually set your price? According to Kim and Mauborgne, the blue ocean strategy pricing approach is a two-step procedure: First, you establish a price range by researching pricing for major alternatives. Then you select a price within that range based on how difficult it is for others to imitate your offering. Let\u2019s consider each of these steps in more detail:<\/p>\n\n\n\n
Determine the Right Price Range<\/strong><\/h3>\n\n\n\nKim and Mauborgne advise that you start by cataloging the alternatives to your product so you can establish the range of prices that customers might expect to pay for a product like yours. They note that some alternatives may look different but serve the same function\u2014 for example, cooking your own food can serve the same function as eating at a restaurant. They also note that some alternatives may serve completely different functions but still achieve the same objective\u2014for example, rock-climbing gear and video games serve very different functions, but they can fulfill the same objective of connecting with friends in a thrilling environment.)<\/p>\n\n\n\n
(Shortform note: When considering pricing, it may be worth considering product alternatives<\/a><\/em> as well, because your customers may consider them. Moore defines<\/a> product alternatives as products with different purposes that are based on the same technology. For example, an electric egg beater<\/a> and an electric drill<\/a> are used for completely different things, but they are made up of essentially the same components: an electric motor, a power supply, a gearbox, a coupling mechanism to hold the drill bits or beaters, and so forth. Consequently, it makes sense that they should cost about the same.)<\/p>\n\n\n\nThe authors advise that higher prices may increase the amount of profit per customer, but not necessarily enough to increase overall profit, if you make fewer sales. To help you zero in on the range of prices that will give you the highest total revenue, Kim and Mauborgne present a graphic tool they call the \u201cprice corridor map.\u201d It\u2019s a graph with price on the vertical axis and a measure of how similar or different the product is to yours on the horizontal axis. The more different a company is from yours, the further to the right it should lie on the horizontal axis. <\/p>\n\n\n\n
Plot each alternative as a circle on the graph. Different alternatives will likely have different numbers of customers, so draw larger circles to represent alternatives with more customers and smaller circles for products with fewer customers.<\/p>\n\n\n\n
According to Kim and Mauborgne, you can then use the distribution of circles on the graph to identify a horizontal band representing the range of prices which you would expect to earn the most total revenue.<\/p>\n\n\n\n
Here\u2019s an example:<\/p>\n\n\n\n
![\"\"](\"https:\/\/lh3.googleusercontent.com\/AfCvu1jvalB1GlOVV7VdDYkuaeaiNBlvM7BlgJ2uwQCwpba0BCl3GJ2EZHlNhqdIaiVOPIt-RmmVz02BTKWO6H2ekjBaSVNSX-lbJmtvLZdw7scIi4AqjFKGbjphGiTCt7lmqvT1\")
<\/figure><\/div>\n\n\n\nShortform Commentary: Another Way of Visualizing Your Optimal Price Range<\/h4>\n\n\n\n
Kim and Mauborgne\u2019s graph shows expected revenue only indirectly: The size of the circles correlates to the number of buyers, while the position of each circle shows the price, so to get the total revenue of any alternative, you would multiply the price by the number of customers.<\/p>\n\n\n\n
To identify the range of prices that maximize revenue, a different kind of graph might be more suitable. Specifically, for each alternative, you could first multiply the price by the number of customers who buy that particular alternative to calculate the total revenue. Then, you could plot the revenue on the y-axis against price on the x-axis, and fit a bell curve<\/a> or polynomial approximation to the data. The curve shows you the relationship between revenue and price, which is what you need to know to select the price range that will yield the most revenue.<\/p>\n\n\n\nFor example, suppose you have the following list of alternative products:<\/p>\n\n\n\n
\u200b\u200b <\/p>\n\n\n\n
1. Often, appealing to the maximum number of buyers maximizes profits, because in many industries, fixed costs (one-time expenses associated with launching your product) are high and marginal costs (ongoing expenses associated with delivering each unit that you sell) are low, so attracting more buyers will subsidize your fixed costs while not costing you much more per customer. This is particularly true in software and R&D-heavy industries.<\/p>\n\n\n\n
2. Many products benefit from network effects<\/a>, where the value of the service scales with the number of users. <\/p>\n\n\n\n (Shortform note: Reid Hoffman and Chris Yeh devote most of their book Blitzscaling<\/em><\/a> to these two points. They explain how the internet has driven marginal costs to near zero in many cases, and discuss the \u201cfirst-scaler advantage\u201d created by network effects. They point out that by growing quickly from the outset, you can reduce the risk of a competitor gaining this advantage before you do. This reinforces Kim and Mauborgne\u2019s blue ocean strategy of pricing for the masses up front.)<\/p>\n\n\n\n 3. Strategic prices help earn a reputation for your brand immediately, making it harder for others to copy your strategy and turn your blue ocean into a red one.<\/p>\n\n\n\n (Shortform note: According to Ries and Trout<\/a>, market leadership is self-perpetuating in this way. They assert that it is almost impossible to displace a market leader<\/a>, once people view them as such, because brand loyalty drives greater demand and their reputation makes it easier for them to raise capital for expansion and attract the best talent to their workforce.)<\/p>\n\n\n\n How do you actually set your price? According to Kim and Mauborgne, the blue ocean strategy pricing approach is a two-step procedure: First, you establish a price range by researching pricing for major alternatives. Then you select a price within that range based on how difficult it is for others to imitate your offering. Let\u2019s consider each of these steps in more detail:<\/p>\n\n\n\n Kim and Mauborgne advise that you start by cataloging the alternatives to your product so you can establish the range of prices that customers might expect to pay for a product like yours. They note that some alternatives may look different but serve the same function\u2014 for example, cooking your own food can serve the same function as eating at a restaurant. They also note that some alternatives may serve completely different functions but still achieve the same objective\u2014for example, rock-climbing gear and video games serve very different functions, but they can fulfill the same objective of connecting with friends in a thrilling environment.)<\/p>\n\n\n\n (Shortform note: When considering pricing, it may be worth considering product alternatives<\/a><\/em> as well, because your customers may consider them. Moore defines<\/a> product alternatives as products with different purposes that are based on the same technology. For example, an electric egg beater<\/a> and an electric drill<\/a> are used for completely different things, but they are made up of essentially the same components: an electric motor, a power supply, a gearbox, a coupling mechanism to hold the drill bits or beaters, and so forth. Consequently, it makes sense that they should cost about the same.)<\/p>\n\n\n\n The authors advise that higher prices may increase the amount of profit per customer, but not necessarily enough to increase overall profit, if you make fewer sales. To help you zero in on the range of prices that will give you the highest total revenue, Kim and Mauborgne present a graphic tool they call the \u201cprice corridor map.\u201d It\u2019s a graph with price on the vertical axis and a measure of how similar or different the product is to yours on the horizontal axis. The more different a company is from yours, the further to the right it should lie on the horizontal axis. <\/p>\n\n\n\n Plot each alternative as a circle on the graph. Different alternatives will likely have different numbers of customers, so draw larger circles to represent alternatives with more customers and smaller circles for products with fewer customers.<\/p>\n\n\n\n According to Kim and Mauborgne, you can then use the distribution of circles on the graph to identify a horizontal band representing the range of prices which you would expect to earn the most total revenue.<\/p>\n\n\n\n Here\u2019s an example:<\/p>\n\n\n\n Kim and Mauborgne\u2019s graph shows expected revenue only indirectly: The size of the circles correlates to the number of buyers, while the position of each circle shows the price, so to get the total revenue of any alternative, you would multiply the price by the number of customers.<\/p>\n\n\n\n To identify the range of prices that maximize revenue, a different kind of graph might be more suitable. Specifically, for each alternative, you could first multiply the price by the number of customers who buy that particular alternative to calculate the total revenue. Then, you could plot the revenue on the y-axis against price on the x-axis, and fit a bell curve<\/a> or polynomial approximation to the data. The curve shows you the relationship between revenue and price, which is what you need to know to select the price range that will yield the most revenue.<\/p>\n\n\n\n For example, suppose you have the following list of alternative products:<\/p>\n\n\n\n \u200b\u200b <\/p>\n\n\n\nDetermine the Right Price Range<\/strong><\/h3>\n\n\n\n
Shortform Commentary: Another Way of Visualizing Your Optimal Price Range<\/h4>\n\n\n\n
![\"\"\/](\"https:\/\/lh3.googleusercontent.com\/QH8IgV-IbEvOuRJEXHTFBj5bmg92Svs0TGRn5bfEXpdn8-sjd6esdiMhuNRONaxYWgFtsxnkVvp9zVsDN9lRwtd39xBivDh97s4giZZniBDmHxLEQU2rgwZ4mRPV_55bTKkitEis\")
<\/figure>\n\n\n\n