Five pricing pitfalls.(Operations)

Seymour Merrin, a veteran computer dealer who now runs a consulting service dedicated to "demystifying the distribution channel," points out that pricing decisions often trigger "a Dracula effect" in companies that are about to introduce a new product: "Perfectly nice, well-behaved executives are suddenly transformed into scrappers, sluggers, and brawlers," says Merrin. "Years of experience are put on the line. Consultants are brought in and voice yet other opinions. More ill-will is generated in a shorter period of time than in the making of any other single decision."

In fact, pricing decisions should be taken seriously, Merrin concedes, because price is always a critical element of product positioning. But he argues that many decisions end up reflecting pricing folklore rather than a solid understanding of how the marketplace functions. The result may be a price that fails to maximize revenue--or at worst, that eventually kills the product or even the company itself.

Merrin recently described several common pricing pitfalls:

* Pricing below true costs: "The biggest single thing smaller software companies screw up is setting a price based only on their cost of goods," says Merrin. "Then when they look at going into the distribution channel, it turns out there isn't enough money in the price to allow for reseller margins. And they're trapped."

* Ignoring competitive price points: Customers generally have "irrational" but nevertheless compelling expectations about the price they expect to pay for various types of software, Merrin notes. Setting a price significantly higher or lower than most competing products is risky, he says. The danger is greatest for relatively inexpensive products, Merrin adds, because buyers pay more attention to price points at the low end of the price scale than at the high end.

* Squeezing reseller profits: Software street prices generally reflect prevailing retail price points, not standard markups, Merrin points out. Thus, products whose wholesale prices range from about $250 to $275 will all end up with the same $295 retail price-but those with the highest wholesale price will generate almost no profit for the dealer. (Increasing the discount to dealers isn't always a solution, Merrin adds, because a lower wholesale price may bump the product down to a lower street price category-such as $249-that provides even less margin for the dealer.)

* Pricing below perceived value: Instead of stimulating demand, a low price often implies that a product isn't as good as a higher-priced competitor. "The new Quattro Professional will sell better at $495, because there's higher perceived value than there was with the old Quattro, which was priced much too low to be taken seriously."

* Making too much money: Selling at an unusually high price is an open invitation to competitors, says Merrin, and "a feeding frenzy soon destroys everyone's profitability." But the rules are different for well-entrenched market leaders. "If you can generate enough demand and get enough market share, you're invulnerable."

Seymour Merrin, president, Merrin Information Services, 2479 East Bayshore Rd., Palo Alto, Calif. 94303; 415/493-5050.