When Microsoft, an industry leader, introduced Xbox into the market, it did so at an initial loss. This case looks at why Microsoft chose to do this and its long-term marketing strategy.

The key to developing a marketing strategy is maintaining the right marketing mix that satisfies the target market and creates long-term relationships with customers. To develop meaningful customer relationships, marketers have to develop and manage the dimensions of the marketing mix to give their firm an advantage over competitors. Successful companies offer at least one dimension of value that surpasses all competitors in the marketplace in meeting customer expectations. However, this does not mean that a company can ignore the other dimensions of the marketing mix; it must maintain acceptable and, if possible, distinguishable differences in the other dimensions as well.

Read the case below and answer the questions that follow.

Because price has a tremendous effect on the success of a company, choosing the right pricing strategy is critical. Interestingly, Microsoft, the company that makes the Xbox 360, set a retail price for the device that is less than what it cost to make it. According to an iSuppli survey, the parts used to make the Xbox 360 cost the company $470 prior to assembly; however, each Xbox retails for $399 – a $71 loss. When additional items such as power supply, cables, and controllers are included, Microsoft's loss for each Xbox 360 increases to $126. In 2005, the Microsoft home entertainment division lost $391 million on sales of $3.3 billion.

So why is Microsoft producing a product on which it loses money? For one thing, the cost of each game for the Xbox 360 has increased by $10 over the previous version of the console. Also, in order to use online multiplayer game functions, customers must pay $70 a year for an Xbox Live subscription, which frequent offers to buy Microsoft games and game add-ons. The company also develops new accessories such as the Kinect, a device that allows users to interact with the Xbox 360 without a controller. In addition, Microsoft hope that people will buy Xboxes and use them as part of their home entertainment systems. The Xbox 360 connects to televisions and allows customers to play music and movies.

With new developments in the gaming industry, content for Xbox Live, and new accessories, it's up to consumers to continue to buy associated products and create that profit that Microsoft is hoping for. With over 50 million units sold so far, the Xbox 360 appears to be a profitable item.

1. Although marketing strategy requires a good marketing mix; which element of the mix is the Microsoft case focused?

Product

Price

Place

Promotion

2. Which stage of the new product development process is the Xbox positioned in the case?

Idea screening

Business analysis

Commercialization

Test marketing

3. The current pricing strategy of the Xbox does not generate __________:

Profit

Revenue

Customers

Cash flow

4. The pricing strategy that Microsoft executes in this case is an example of:

Skimming

Penetration

Psychological pricing

Reference pricing

5. After the purchase of the Xbox hardware, Microsoft's marketing strategy will shift to a focus on which element of the marketing mix?

Product

Price

Place

Promotion