When companies think of product life-cycle management (PLCM), they always think of a product’s introduction stage, its growth stage, its market saturation (peak) stage and its decline stage. During each of these stages, a company typically follows a set path in terms of its pricing strategies. That is of course, unless you’re Sony. What did Sony do with its PS2 and PS3 consoles that differentiated it from typical product introductions? Well, they treated their consoles as loss-leaders and intentionally sold them to lose money. The company ignored conventional wisdom of product introductions and sold their consoles at a loss in order to grab market share.
Understanding Loss-Leader Pricing Strategies
Most companies find it counterproductive to sell at a loss. Granted, companies are in business to make a profit. However, for some companies, there are some inherent benefits to using loss-leader pricing strategies. These companies believe doing this allows them to secure market share, while ensuring their product introduction is immediately adopted by their market and its customers. Unfortunately, this implies the company must then change pricing at a later date to make up for their losses, right? Well, in Sony’s case, this never happened. In fact, they continued to lower the price of their consoles. So, why did they do this?
The company's main focus was on providing content through sales of its games and software. As such, the losses on any one console were more than made up by the profit derived through the sale of multiple games. This is where Sony made its money. The company made a calculated decision to sell its consoles at a loss in order to guarantee its future profit. Of course, it also had to contend with competitors such as X-Box & Nintendo, both of which were cognizant the approach and were adopting similar strategies.
An Example of Selling at a Loss to Grow Market Share
The following two tables show how Sony's pricing strategy might have worked. Let's assume that the profit on any one game averages $15.00. Now let's assume that for every console sold, the company expects to sell an average of 60 games over the consoles life. This means the profit on games per console is $900.00. In addition, the loss on each console sold is $450.00. Ultimately, whatever the company loses on its consoles is more than made up on sales of its games over the consoles life-cycle. The question your company must answer is whether this type of strategy makes sense for your business. Can you use similar approaches?
The two tables above are from the post: Product Life Cycle Management: Grow Market Share by Selling at a Loss. The post explains how Sony decided to use its consoles as a loss-leader product line in order to secure its profit on the sales of games.
Can Companies Emulate These Pricing Strategies?
Companies are in business to make a profit. Lowering pricing to increase market share, and then increasing pricing later to make up for any previous losses, is not a strategy you should adhere to. However, it’s hard to argue with Sony’s strategy and ultimately, with its results. In essence, they’ve treated their consoles as a mechanism to sell more lucrative products. They then controlled that profit by controlling content.
Companies that want to emulate this strategy must be cognizant of the costs of such a move. In Sony’s case, they may have been forced to take such a stance due to the constant pressure from competitors. As such, it’s fair to ask whether they would have pursued such a strategy if not for their competitors offering similar offerings. Maybe they would have, as the net result worked in their favor.
Most product introductions and life-cycles follow the four aforementioned steps of 1) an introduction stage, 2) a growth stage, 3) a peak stage and 4) a decline stage. In some cases, there's a fifth stage where a product experiences a rebirth of sorts. In the case of Sony, they sped up their introduction stage in order to secure a large portion of the gaming industry.
The video above is from the post: The Fifth Cycle of Product Life-Cycle Management: Rebirth & Growth
Sony’s PS2 & PS3 eschewed the conventional wisdom adopted by product life-cycle management. They ignored their high costs during their introduction phase and instead focused on the growth phase of their games. In the end, it allowed them to secure profit, establish their market position and guarantee demand for future software.
It’s a strategy that worked out, but one that most companies should analyze thoroughly before pursuing. Ultimately, your company must be market experts and be able to define the benefit of selling a given product to lose money. Again, it's best to do this when you know that the sale of one product means multiple sales of other complimentary products.
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