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Evolving Price Strategies for RFID Tags
In this guest contribution, Frost & Sullivan analyst Priyanka Gouthaman explores the evolution of RFID tag pricing strategies seen thusfar in the market and predicts what to expect going forward.
Jun 28, 2006—This article was originally published by RFID Update.
June 28, 2006—As RFID has become increasing commercialized and its application across different markets more pervasive, the price of tags has been the topic of much debate. A number of inlay and tag manufacturers including Alien Technology, Avery Dennison RFID, RSI ID Technologies, UPM Raflatac, and SmartCode Corp. announced price reductions during 2005 and 2006. These price reductions are expected to be characteristic of a market penetration pricing strategy as opposed to a full blown price war within the RFID industry. Inducing wider adoption of the technology and driving business cases that support tagging volumes is one of the significant premises for the decreasing tag prices. While a low price strategy has been promoted by a multitude of vendors, other participants such as Symbol Technologies have notably refrained from lowering their tag prices. Tag and inlay vendors focusing on niche market needs and specialized tag requirements have maintained price levels that are at the higher end of the spectrum.
The impact of progressive standards and protocols introduced within the RFID industry is also expected to be central to the strategic outlook adopted by RFID vendors. Pricing strategies have been among the significant tools employed to facilitate the transition towards the Gen2 protocol while ensuring a profitable phasing out of the existing Gen1 inventory. Tags and inlays for both Gen1 and Gen2 have been priced similarly by those vendors that issued price reductions in 2005 and 2006. The pricing focus is aimed at increasing the adoption of Gen2 tags with the expectation that future volumes are likely to center on the Gen2 standard. Market participants expect margin losses suffered today to be regained once the technology matures and tagging volumes are a mainstay within the market.
The existing pricing focus of market participants is likely to reflect their future target markets. While most companies are operating on nonexistent margins within their RFID tag and inlay product lines, differences in positioning of product and price strategies are gradually becoming visible.
The difference in focus that is expected in light of the existing framework of mandate compliance and pricing strategies is briefly discussed below.
Future Economies of Scale
The long-term vision for RFID involves pervasive data capture applications that can be realized at the item level. The promise of volumes within mandate-driven markets (such as Wal-Mart and the US Department of Defense) has been a key focus for most RFID vendors since they represent definitive opportunities to achieve significant economies of scale. However, low trading margins within verticals such as retail mean that most suppliers have initially adopted a slap-and-ship approach to achieve compliance. Low tag prices are therefore a critical factor to such suppliers compelled by immediate mandate requirements.
Identifying Other High Volume Opportunities
Adopting a low price strategy within verticals with low compliance requirements would necessitate vendors to assess the future volume potential within these markets. The pharmaceutical market is a case in point. While the FDA has recommended the use of RFID, there are no specific mandates within the vertical. Low tag prices are expected to expand RFID pilots to high-volume, low-priced product lines, thereby stimulating future deployment across the pharmaceutical supply chain.
Leveraging Product Innovation and Customized Needs
Markets that are not strongly influenced by compliance and that have specialized RFID form factor and design requirements are likely to emerge as significant opportunities for high price strategies. Rugged manufacturing environments and markets with immediate traceability demands or highly customized tag requirements are expected to adopt RFID technology even at relatively higher tag prices. RFID vendors with a strong emphasis on product innovation are likely to succeed with high price strategies within such niche market avenues.
Positioning on Quality and Performance
RFID vendors adopting a higher pricing strategy today are likely to evolve their market positioning on the basis of enhanced quality and performance. While the present nascence of the RFID market does not necessarily mean a direct price-to-quality relationship, the situation is a possibility in mature market conditions. The increasing emphasis on performance within end-user segments is expected to have a positive impact on vendors adopting this positioning focus. Mandates requiring mere compliance are likely to evolve and include performance demands in the future.
The price of tags is likely to remain a significant focus within the RFID industry. While tag price have been touted as a significant challenge for widespread adoption of the technology, it has also served to scale down the initial hype that surrounded the market in light of the Wal-Mart and Department of Defense mandates. In cases where compliance pressures are absent, most suppliers are adopting a "wait-and-watch approach" for the prices to decline and are restricting investments to small-scale pilots for now. Decreasing tag costs and increasing emphasis on underlying business cases is a positive step toward realistic growth rates within the industry.
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