What is New Product Pricing
Pricing may seem simple and easy. But it’s a very important and challenging part of any business especially when the product is new in the market because you don’t know how the market would react to the product price. Therefore, businesses and companies may test various pricing strategies before setting the final price of a new product.
Some companies may follow the cost-plus pricing strategy, it means adding up all the fixed and variable costs and then add a percentage of profit on it. Other businesses may follow the return on investment strategy; it means that you decide how much return you want on your investment. It doesn’t matter whatever the case is, companies should also keep in mind the demand and market competition factor before pricing the new product.
Market demand vs. Pricing
It’s important to know the demand for your company’s product in the market before setting the price. You should know that whether people are sensitive to the price of your product. It means that the demand for the product would be lower if the price is higher.
If people aren’t sensitive about the pricing of the product, it means that the high prices won’t affect the product demand in the market. It usually happens with technical products. For instance, the high prices of the latest model of the mobile phone won’t affect the product’s demand in the market, because people are focused on the product and they care less about the price.
Pricing Strategy for New Products
As we know that a product passes through the different stages in its life cycle and its demand changes at every stage. Therefore, the pricing strategy of the product changes at different stages of the product’s life cycle with varying demand. The introductory stage is when the product is new in the market.
Therefore, when companies launch the new product in the market, they face a challenge that what type of pricing strategy they should follow, price skimming, or price penetration. Let discuss them in detail;
Price Skimming Strategy
Price skimming strategy is when a company launches a new product in the market, and then it follows price skimming. It means that charging high prices for the new product. The purpose is to skim maximum profit from the market layer by layer because the market is willing to pay high prices. It also goes by the name of the market skimming pricing strategy.
Companies follow the price skimming strategy is to earn a maximum profit for the new product. They lower the prices at the later stages of the product’s lifecycle. The sale of the new product may be lower in the beginning, but the company earns maximum profit because of the price skimming strategy.
Example Price Skimming
When companies like Apple or Samsung plan to invent some new products or the latest model of iPhone or Android, then they have to spend a lot of capital, manpower, and resources in the research and development. Therefore, such companies follow the price skimming strategy because they have to cover the high expenses in the beginning.
That’s why the prices of the latest model of smartphones are higher in the beginning, and only those people buy it who is interested in the latest model. A few months later, the company drops the prices in the 2nd stage to attract more people. In the 3rd stage after some time, the company drops the prices to target the price-conscious customers.
You must have noticed these trends. That’s how smartphone companies skim profit layer by layer at different stages of the product’s lifecycle.
Price skimming strategy may be suitable for some products, but it doesn’t work with all the categories of products. Factors like the product’s quality, brand image, and customers’ perception matter in some categories. Where customers think that the price of the product is matched with research and development cost, that’s they justify the price.
But in some other product categories where the cost of the product is lower, if you follow the price skimming strategy, then it won’t be much advantageous. If competitors see your product not working with the price skimming strategy, they would lower the prices to damage your business.
Penetration Pricing Strategy
Price penetration strategy is when companies set the prices lower for the new product. Price penetration is opposite to the price skimming strategy. Where you skim off the price, the purpose is to make the new product penetrate the market.
Companies follow the price penetration strategy to win the market share of the price-conscious customers, but at the cost of low profitability. If the sale of the new product increases because of the lower prices, it would make the company cut the prices more in the future.
Example of Penetration Pricing Strategy
Many companies follow a price penetration strategy. Ikea, a Swedish Furniture Company is one of them. It has lowered its product prices to penetrate the market. That’s how the company has attracted the price-conscious market across the world.
Although Ikea is selling its furniture products at lower prices, that means lower profitability. But the question is how the company is managing it. The answer to secrete is that less price increases the sale volume, and the company maintains its profitability with more sales.
Price penetration strategy works in a certain market where you have to check factors like; the customers in the target market must be price sensitive. It means when a company/business lowers the prices, then it would attract a large number of customers towards it. More customers would increase sales.
Price penetration is similar to the economies of the scale concept. Where you push the competition out of the market by lowering the prices, it means more customers, more sales, and fewer prices. Keep in mind that price penetration works only in a short time.
Businesses and companies have to understand one thing that they just can’t keep the price changes (high or low) forever. The price changing strategy can work only in the short term. For instance, if a company follows the price skimming strategy in the long term, then it would lose the majority of the customer market share. If a business adopts the price penetration strategy for a long time, then the company would lose the profit and it would lead to the company’s bankruptcy.
However, businesses should offer occasional price reductions and discounts to customers to win customers’ loyalty. Some businesses provide some offers to their customers at the new product, where customers would have the opportunity to win cash prizes in the future.
The product pricing strategy article tells us how different factors affect the pricing strategy of the new product. Companies use a price skimming strategy to recover the research and development cost, and they use a price penetration strategy to penetrate the market and win market share.
Some companies ask the customers before finalizing the price of the new product. They conduct a focus group and market research for this purpose, and they ask customers how much they’re willing to pay for such a product. How much they value the product because their perception is also important. When you have answers to such questions, then you should follow the price strategy accordingly.