New Product Pricing Strategies
Introduction
Pricing strategies change as a new product passes through its life cycle. However, the introductory stage is particularly more challenging as companies face the challenge of setting prices for the very first time they launch a new product.
Therefore, it is unavoidable to estimate demand, particularly in the early stages of launching a new product; while also forecasting the effect of possible combinations of prices, and selecting the required promotion policy. However, policy revisions become necessary as the product’s market condition matures.
New products have a protected uniqueness that is confounded to decline from competitive penetration. The invention of a new product is usually followed by patent protection as the market is still unexplored. Then the period of rapid growth in sales occurs as market acceptance begins to set in.
Next, the new product becomes a goal for competitive entry or encroachment. Hence, new competing firms enter the market, and innovations close the gap of uniqueness between the new product and its substitutes.
Throughout the product life cycle, changes occur in dissemination, price elasticity and also in costs of production and distribution. These changes call for adjustments in pricing policies of a new product adopted by firms.
Table of content
- What is New Product Pricing
- Strategies in new product pricing;
- Price Skimming Strategy
- Promotional Pricing Strategy
- Market penetration strategy
- Lower Than the Competition
- Ask Customers when Setting Prices
- Parity Pricing Strategy
- Study Demand When Setting Price
- Cannibalization strategy
- Same Price with a Common Necessity product
- Variable Pricing Strategy
- Test Price Point strategy
- Freemium Pricing strategy
- Life cycle strategy
- Double price of the Competition
- Decoy & Psychological Pricing
- Product-Line Pricing Strategy
- Undercutting Pricing strategy
- Experience Curve Pricing
- Lower price than Complementary Product
- Hire purchase
- No Money Down
- Competitors’ reactions
- Cost-related Pricing Strategy
- Cyclical pricing
- Bundled pricing strategy
- Conclusion
What is New Product Pricing
Pricing is an important yet challenging aspect of business particularly when the product is new in the market. This is because no one knows how the market will react to the product price in question. Therefore, firms may test numerous pricing strategies before settling on the price of the new product.
Some firms may adopt the cost-plus pricing strategy in pricing a new product. This means summing all the fixed and variable costs, and profit percentage.
On the other hand, firms may choose the return on investment strategy. This means deciding how much return you want on your investment made.
In conclusion, firms should consider the demand and market competition factor when setting a price for a new product.
Pricing Objectives of a business
This means the objectives that a firm seeks to achieve from the pricing of a product. Pricing decisions gravely affect other functional aspects like financial and production. Therefore, it is important to set goals whilst having the goals of the firm in mind; that is, the goals that a firm seeks to achieve in a long run.
First and foremost, all firms seek long-term survival. Organizations generally seek to survive through success by adding value to their products. This can be achieved by optimizing the prices of the product or service that the firm renders.
Next is the maximization of profits. With this objective, firms beseech to maximize profits by appraising the cost of demand and different prices, thereby choosing the price that has a high cash flow margin.
However, this goal is difficult to accomplish because estimating demand accurately is difficult. Also, other elements of demand such as the reaction of competitors marketing mix elements are hard to ascertain.
Finally, firms target market share leadership. Firms anticipate market leadership by adopting the skimming strategy to achieve long-term profitability. Therefore, firms must take note of the other marketing mix.
However, the market penetration strategy helps to realize the firm’s goal of preventing new competitors from entering the market.
Strategies in new product pricing;
The following outlines the possible strategies to adopt at each stage of a new product market evolution.
Price Skimming Strategy
When a company launches a new product, it follows price skimming. This means fixing high prices for the new product. This is to scoop a maximum profit from the market since the market is willing to pay high prices.
However, prices are reduced at the later stages of the product’s lifecycle.
Promotional Pricing Strategy
The end goal of using promotional pricing is to elevate sales for the short-term. It involves taking the lead in reducing prices, comparing with other higher prices that are the regular list price. A firm creates a buzz when launching a green product and hence increasing customer traffic to that product.
Market penetration strategy
This strategy focuses on grabbing the maximum market share by reducing the price of the product at launch. This helps the product penetrate the market and attract buyers. Here, a firm reduces the price of the new product to capture the majority of the market share.
This is usually helpful in the primary stages of a business.
Lower Than the Competition
In this type of strategy, the firm increases prices slightly higher than the competition with a huge discount. Consumers will get the message that your product is superior to that of your competitors. Yet, you want to reduce the barriers that people have to give it a try.
Ask Customers when Setting Prices
One of the best ways to set prices for your new products is by asking your consumers. Firms usually use “ghosting” and marketing research to ascertain prices for new products. The objective is to ascertain how much customers are willing to pay for that product.
Parity Pricing Strategy
Competitive pricing is an important pricing strategy that helps a business fix price in line with the competition. Here, price is set the same as competing businesses in the market. Price is one of the deciding factors that consumers notice about a new product.
So, if you set your price too high above or far below market price, consumers might go elsewhere. Therefore, set your price in line with other businesses and compete for customers.
Study Demand When Setting Price
Demand can be relatively elastic in the market; this is to say that consumers are so sensitive to price changes of a product. Therefore, if the price of a product increases, consumer’s demand for that product will reduce.
Contrarily, when demand is highly inelastic, consumers are not overly concerned with price. In this vein, assess these conditions; know the kind of customers you are dealing with before setting a price.
Cannibalization strategy
Carefully consider how new products will affect the current products of your firm. If an older product is still viable to your company, try to handle the cannibalization problem with skill. Hence, give the new product a higher price to target a smaller group of customers.
Contrarily, if a product line is being retired, reduce the price for the new product to shift customers to it.
Same Price with a Common Necessity product
Necessity goods refer to products that consumers will still buy no matter the change in their income levels. In this case, your prices should be set in line with the necessary product of your new product. The elasticity and inelasticity of demand do not apply in this kind of market.
This will draw the attention of customers to what is as important and the same price as what they buy.
Variable Pricing Strategy
Businesses sell the same product or service at different prices depending on the demand at a particular place or time. Here, firms offer a variety of prices of the same product to different customers. The goal is to optimize profit by delivering the best prices at all point-of-sales.
Test Price Point strategy
This is a strategy applicable when a business does not know how much to sell its green product at a given time. Hence, they try different prices until they settle on the best price that attracts more traffic. Also, it allows firms to measure the elasticity of demand that is crucial information in determining the price.
A price point may work for others but may not work for you. Be sure to do your own tests and not copy what worked for other firms.
Freemium Pricing strategy
This is best practiced in the service industry where a set of services are offered for free but with some additional content for a fee. As users become more accustomed to your service, they are willing to pay for the whole package. The customer is also allowed to use the product until a certain usage threshold is hit; then, the customer is required to buy.
Life cycle strategy
In a case where an early-adopter market segment is willing to pay higher, then consider a high release price. Capture additional value with planned reductions to attract latecomers. This strategy also helps firms match the demand to production capacity for new products.
Double price of the Competition
This strategy is exceedingly useful when dealing with high-end products for the upper social class. The price of a product speaks volumes about the product. Therefore, double your price as that of the competitor and add some features that would warrant such a price tag.
Decoy & Psychological Pricing
This strategy is in a way to force customer choice unknowingly. The prices for similar products are set differently to drive more sales for the cheaper alternative. Put differently, increases the sales of a high-profit product by creating a different version of it at a reduced price. This is to make it seem economical by comparison.
Product-Line Pricing Strategy
With this type of strategy, goods are separated into cost categories creating numerous features and qualities in the minds of the customer. Product-line pricing focuses on total-profit when pricing rather than a single item-profit. Here, the objective is to increase profit for the total product line instead of gaining higher profits for an individual product in the line.
Undercutting Pricing strategy
this is a pricing strategy where goods and services are offered at lower price points or free. It drives out the competition and creates barriers to entry into that market. The firm may be making a loss on each sale yet, it is done to drive competition out of the market completely.
Experience Curve Pricing
This strategy prices a product lower than the average cost on the basis that cost will reduce as production experience increases. Also, the experience curve strategy of pricing exploits learning by doing. The more a business has experience in producing a particular product, the lower its cost becomes.
Lower price than Complementary Product
This is a smart way to introduce a new product to the market. Sell it along with an already existing but complementary product. Therefore, the pricing strategy here is to sell it lower than the complementary product.
Hire purchase
This is an installment plan arrangement for the purchase of expensive consumer products. Here, a customer will make a first down payment then pay the remaining balance in installments. This strategy does not give customers much consideration on the price because it is paid in bits while using the product.
No Money Down
This strategy cannot be applied to every product in the market. The company allows the customer to test the product for free for a period and can decide to pay for it afterward or return the product. This is in the form of a trial period.
Competitors’ reactions
In pricing new products, low prices tend to be noticeable and shift the market share in favor of your firm. This will trigger a destructive price war within the market. Competitors, on the other hand, can’t react immediately by improving the benefits of their commodities but often reduce prices instead.
A higher reference price shows that a company is aiming for profits rather than market share and will generate few if there are reactions from competitors.
Cost-related Pricing Strategy
A cost-based strategy sets the basis for a price that a company can charge for a product. It helps the company decide a price point based on the cost of production and distribution of a product. Also, a rate of return is added to cater for the company’s risks and efforts.
Cyclical pricing
Under this strategy, the prices of a product fluctuate according to the economic conditions of that particular country. Therefore, during a depression, firms reduce the price of the product while in a boom, they increase the price. In this case, when introducing a new product, you first have to study these economic conditions.
Bundled pricing strategy
Lastly, bundled pricing strategy is where firms bundle multiple products or services together and lower the price than selling the items separately. Bundling, however, encourages customers to purchase more. The customer saves money while the company makes profit if products are bundled instead of buying them separately.
Conclusion
Deciding the Pricing strategy at the launch of a product is one of the crucial decisions that make way for increased product adoption. As industries are in constant disruption with new technologies, pricing strategies have to be closely monitored for effectiveness to reflect the changing market. Pricing strategies keep changing; so, they have to be optimized to ensure the success of the innovation.
What other strategies of pricing a new product do you have to add to the above strategies? Tell us in the comment box.
