In June, Netflix announced a price increase and the airwaves erupted in complaints of price gouging. But, this price increase may have been a brilliant, efficient and considerate
form of market withdrawal under certain circumstances.

Pricing is employed as a means of market penetration, but is seldom utilized for exiting a market. Yet, pricing provides a means of market withdrawal which allows customers to find alternative suppliers in an orderly manner. While it is unlikely that Netflix truly intends to exit the business, there utilization of pricing reminds us of several previous activities and it serves as a reminder of an important, underutilized method of market withdrawal.

We have worked with clients in considering pricing as one of a number of options for exiting a product or product segment. The objection most used is that the company withdrawing from the market does not want to be perceived as gouging their clients. Instead, the preference is to withdraw product from the market and leave the loyal customer in the position for an alternative sometimes with, but often without, a recommendation from the supplier. We have, nonetheless, worked successfully to implement a pricing approach to market withdrawal. We must also say that market reaction was quite positive.

Although long before the founding of Ozanne Analytics, one of the best examples of utilizing pricing to withdraw from a market comes from GE in the 1960′s. GE manufactured a key component of a large number of both commercial and military products. This component is virtually unknown to most people today. It was a vacuum tube (For information, go to http//en.wikipedia.org/vacuum tube). The tube business was being cannibalized by a somewhat more familiar product – the transistor or semiconductor. As demand declined for vacuum tubes, marginal costs increased substantially.

Many suppliers had withdrawn from this increasingly unprofitable market leaving a small number of players mulling alternatives from market exit. Customers were moving towards alternatives, but had to change their processes (and products) to meet the new technologies. GE decided it could not withdraw and leave these its customers in a lurch. Instead, GE decided to “encourage” faster movement away from the tubes to the new technology by increasing the price. In many cases, the price increased by hundreds of percentage points. This approach, they reasoned, provided cost incentives to change technologies (or suppliers) while providing support until that change could be effected. The decision was communicated and the strategy implemented.

Within months of the price increase, the other two major suppliers of tubes WITHDREW from the market leaving GE as the only provider. As late as the 1980′s when I was working for GE, the Owensboro, Kentucky plant met the worldwide demand for these tubes and was immensely profitable. Moreover, the customers were very pleased that GE had not left them without alternatives. In fact, in the short (and long) run, the strategy was extremely effective.

As you think about market withdrawal, think about pricing as a facilitator. Do it right and who knows.