Demand-Based Optimization Modeling to Improve Price Setting
The list of products that have failed due to a mismatch between price and customer perception is incredibly long. For example, IBM's PCjr, which entered the early computer market and was priced far higher than the roughly equivalent Atari and Commodore models. The consequence? PCjr faded away.4–6 Unfortunately, IBM's woes did not stop there. The company also made the mistake of underpricing the IBM 7030 (Stretch) to such a point that it lost money on every sale until it ceased production in 1964.7,8 The Apple Newton is another example.9 Arriving ahead of its time in the early 1990s, this $700 handheld was priced too high to break into the market. When personal digital assistants (PDAs) became more popular in the late 1990s, Apple had already dropped the brand for being unprofitable.10–12
Even McDonald's has fallen into the pricing trap. The company created the Arch Deluxe hamburger and marketed it to the fast food consumer market as a more sophisticated offering for an adult palate. It was expensive. To launch the new burger, McDonald's distributed coupons allowing it to be purchased, initially, for only $1.00. But the Arch Deluxe failed to catch on and became a costly mistake.13–16 Ultimately, the market always has the final say on whether new products and pricing decisions were well conceived.
To a company with multiple entries in a complex market, setting the prices of all the products in its portfolio can be an imposing ...