Pricing against piracy

The earliest paradigm of pricing was based on cost. Product and service developers and innovators had to gather all their costs and present a cost structure. From the cost structure, a margin was determined and finally a price was set.

One of the newer paradigms of pricing is using value to the customer. It is sometimes called value-based pricing. It is totally devoid of cost considerations as the primary basis for pricing. Rather, it is market-based priced. Because of today’s technological advances, a new pricing principle has emerged.

This surfaced during a session I had with a Filipino inventor.

This inventor of several products showed me his latest work with the initial intention of demonstrating the device and explaining the need it was meant to satisfy. Eventually, he raised the critical question: How much should I price the product?

The inventor expected me to ask for his cost structure and the corresponding consumer analysis. Little did he realize that gurus of the AIM’s Asian Center for Entrepreneurship do not answer questions directly. Instead, we answer questions with questions. This learning methodology predisposes student-entrepreneurs to answer their own questions. In the process, they learn how to learn by themselves. Soon, they answer their own questions. And soon, they become masters themselves.

I shared a short anecdote with this inventor and then proceeded to ask him several questions. It described a situation where a customer asked a venture of pirated products if he carried a copy of a particular brand. The vendor’s retort was: "Oh, that brand? I do not carry it. It is too cheap to copy. I suggest you just buy the real one."

This was the Q&A that followed:

Guru: Is your product easy to copy?

Inventor: Yes. It is composed of several generic electronic components soldered together on a motherboard. The motherboard can be easily made and the components are available worldwide. Although the casing was designed by me and manufactured for me, it is no rocket science. It can be done by others at an even lower cost than I got it for.

Guru: Does it really do what you designed it to do? Are there many people who need something like this?

Inventor: Yes, on both counts! Many people have this problem in this particular sport and this gadget solves it. Many have tried the prototype and the gadget has improved their game. I have asked people who have tried my prototype to compare my products with others that have been marketed to solve the same problem. They have definitely confirmed that it is my gadget that has really solved their problem.

Guru: What does my brief anecdote about the pirated product tell you?

Inventor: Since my product is easy to copy, there will be pirates who will try to steal my invention by copying it and selling at a lower price. Since my production cost is low, I must price my invention so it is not worth copying. If I price my invention to fully pay for my conceptualization and product development costs in a very short time, it will only attract pirates. I may end up seeing copies of my invention being sold at less than half the price.

Many entrepreneurs using creativity and innovation develop products and services that satisfy the needs in the market place. Many of them cry "foul" when their designs or services are "creatively" copied and sold at much lower prices.

But keep in mind that it was the large margin over direct cost that attracted the pirate. Entrepreneurs must price their "easily copyable" inventions such that they do not attract pirates. This is the right price. If it attracts pirates, it is the wrong price. Unless there is some technology that serves as a barrier to copying the product or service, pirates will strike if the price is wrong.

If there is a definite technology that will serve as a barrier to copying, then it is not the price that will make the product or service unattractive to copy. It will be the technology. Therefore, if your invention or innovation cannot be protected by technology, protect it by price.

(Alejandrino Ferreria is the associate dean of the Asian Center for Entrepreneurship of the Asian Institute of Management. For further comments and inquiries, you may contact him at [email protected]. Published "Entrepreneur’s Helpline" columns can be viewed on the AIM website at http//: www.aim.edu.ph).