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Avoiding Cannibalization in Solution Packaging and Pricing

by Todd Berkowitz  |  September 25, 2013  |  1 Comment

 

The Apple iPhone 5S and 5C models went on sale last weekend, and by all accounts, it was a very successful launch. More than nine million units were sold in the first three days. What made this launch interesting to me was that Apple was introducing two different models, ostensibly to appeal to different buyers. However, people only (generally) need one smartphone and there was a possibility that potential buyers of the 5S would buy the lower-priced 5C instead. Apple didn’t disclose the individual sales figures, but it appears both did well and the 5S is bumping up against supply constraints.

The 5C costs less to produce than the current iPhone 5 model, it comes in a range of colors, and was designed to take advantage of the markets in Asia, so Apple did have some very compelling reasons to introduce that phone. But the risk of cannibalization was real, even for a company as adept at marketing as Apple. But so far, Apple seems to have avoided that fate.

But this brings us to a broader question. How can technology companies effectively bring to market different solutions that appeal to different buyer segments, specifically more cost-conscious or budget-constrained ones, without running the risk of cannibalizing sales from the higher-priced offerings? And conversely, how can they market effectively to the more budget-conscious segment without making it appear like they are simply providing the “lite” or “junior varsity” version of the premium solution?

There are any number of providers, both those that serve consumers (B2C) and busineses (B2B) that offered tiered packaging and pricing, with each level providing more features, better support, more capacity or some other set of easy-to-understand metrics. But many companies, particularly B2B software and services providers, really only have a single core solution with a series of add-on modules or services. And those often only appeal to a more well-healed set of buyers. If these providers want to move down market, because they sense an opportunity or face saturation or competitive pressure in their core market, coming out with an attractive offering that doesn’t cannibalize the core offering is a huge challenge. Here are some suggestions to avoid that fate:

  • Make sure you understand what is preventing that segment from buying your solution today; Is it simply price, or is there a complexity that requires mature processes and dedicated internal resources? Can they afford the solution, but not the implementation?
  • Design an offer with a very specific set of capabilities, including guardrails, and ensure that there are processes in place to ensure adherence to those requirements; If you start loosening the standards, there will be less differentiation between the offers and cannibalization becomes more likely
  • Enable your sales force (and channels) to understand the requirements and the specific use cases that would make more sense for the new offer and make sure they understand which ones don’t make sense; The worst of all worlds is to sell someone a lower-priced solution that doesn’t meet their needs and causes you to leave money on the table
  • Consider the optics when you set the price differences; If the new solution is significantly less than half the price of the original one, this is a potential red flag
  • Don’t lead with the new solution unless you know the buyer can’t afford the original one or you are in a competitive situation with a lower-priced rival; If that pressure doesn’t exist, you should lead with the original solution and only introduce the lower-price one if it becomes necessary
  • Know your target market; Even a lower-priced solution only makes sense for a certain type of buyer, so don’t just assume the target market is everyone who can’t afford your current solution

More often than not, launching a new solution targeted at a different market segment doesn’t require creation of an entirely new piece product or methodology. It often just requires creative packaging and pricing. When that is the case, adherence to these principles becomes even more important, and you probably need to take them a step further. Unless you have a really compelling reason to do so, you shouldn’t go out of your way to promote it as being a new solution on your Web site or in your campaigns. If your solution has a reputation as being expensive and complicated, it might be worth specifically calling it out as a separate offer in all of your inbound and outbound marketing efforts. But if that isn’t the case, then taking a more subtle approach, at least initially, makes more sense.

 

 

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Category: pricing-and-packaging  

Tags: packaging  pricing  product-marketing  segmentation  

Todd Berkowitz
Research Vice President
3 years at Gartner
18 years IT Industry

Todd Berkowitz is a Research Vice President focusing on B2B technology marketing and sales. He advises product marketing leaders, CMOs and sales enablement leaders on how to improve the effectiveness of their demand generation, sales enablement, account-based marketing and upsell/cross-sell efforts. He also looks at how data, analytics, content and tools can improve marketing-sales alignment and overall effectiveness.. Read Full Bio


Thoughts on Avoiding Cannibalization in Solution Packaging and Pricing


  1. […] I started thinking about cannibalization recently when we were discussing some new options for Gartner clients.    As I was researching this post, I was reminded of a post by my colleague, Todd Berkowitz, about strategies to avoid cannibalization. […]



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