Charging a lesser price for a new product may not always be a good decision.
One of the key questions to answer while launching a new product is- how much should the product be priced at? But the dilemma that most companies face here is that if they charge too much for a new product it won’t sell, and if the product is priced too low the product’s market value proposition becomes low. Moreover, once companies decide on their initial product pricing strategies and a price is set for a product, it becomes extremely difficult to raise prices.
Today, businesses and consumers alike are demanding more for less, making it even more difficult for brands to formulate product pricing strategies that are favorable to all the parties involved. Global competition, increased pricing transparency, and lesser market entry barriers across industries are forcing brands to rethink their new product pricing strategies. Before zeroing in on their product pricing strategies, companies must have a clear estimate of the highest and the lowest price that they could charge for a product. Then a detailed price-benefit analysis must be undertaken during the preliminary stages in the product development cycle. This not only shows companies whether price barriers might make products unfeasible but can also guide their development by indicating the product attributes for which customers may be most willing to pay for.
Product pricing strategies for a new product
Some of the key product pricing strategies that can be used for a new product include:
Pricing a new product could often prove to be a challenging task. An important tactic that can be followed by companies is to set different prices for different market segments. In order to enhance profits, markets can be split into sectors based on differences in price sensitivity. Higher prices can be charged to those who are impervious and lower prices to the more price sensitive customers.
Companies often get tempted to build market share, especially with the launch of every new product, through aggressively low prices. This competitive product pricing strategy is known as penetration pricing. However, a fixation on volume could reduce profitability and consequently ignite a price war. As a result, it is generally advisable to keep upward pressure on prices and promote good industry pricing behavior. On rare occasions, however, the price lever may be an effective tool to undermine competition.
Cost compression curve pricing
Cost forecasting for pricing new products is based on the cost compression curve, which relates the actual manufacturing cost per unit of value added to the cumulative quantity that is produced. This cost function is mainly the consequence of cost-cutting investments to discover and achieve internal substitutions, automation, worker learning, scale economies, and technological advances. Usually, these move together as a logarithmic function of accumulated output. Such product pricing strategies are highly effective when the product superiority over rivals is minimal and when entry and expansion by competitors is easy and probable.