6 Fascinating Price Strategies for New Products

6 Fascinating Price Strategies for New Products

New product price strategies are critical before product introduction.

Learn about new product price strategies that will lead to explosive growth.

Introducing a new product to the market can be a daunting task. You have to worry about designing and manufacturing a quality product.

Still, you also have to develop an effective pricing strategy that will allow you to make a profit while still competing with other brands. 

There are several different ways to price a new product, and the best option for your business will depend on various factors.

One common pricing strategy for new products is skimming. This involves setting a high price for the product to maximize profits early. 

While this can be an effective strategy, it can also backfire if customers perceive the product as overpriced and are unwilling to pay the high price.

Another option is to penetrate the market at a lower price. This can help you attract more customers and boost sales in the short term, but it may not be sustainable in the long run if your competitors can undercut you on price.

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Introducing a new product to the market can be a daunting task. You have to worry about designing and manufacturing a quality product. Still, you also have to come up with an effective pricing strategy that will allow you to make a profit while still competing with other brands.

There are several different ways to price a new product, and the best option for your business will depend on various factors.

How are prices set? In the past, prices were set by buyers and sellers negotiating with each other. Sellers would ask for a higher price than expected, and buyers would offer less than expected. Through bargaining, they would arrive at an acceptable price.

The strategic importance of price demonstrates how products, distribution, price, and promotion strategies will fit together into an integrated strategy of program positioning. 

Analyzing the pricing situation is necessary to develop a price strategy for a new product mix or line or select a price strategy for a new product or brand. 

Underlying strategy formulation is several important strategic activities, including analysis of the product market, cost, competition, and legal and ethical considerations.

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Pricing is a problem when a company has to set a price for the first time. 

This happens when: 

  • The company develops or acquires a new product
  • When it introduces its regular product into a new distribution channel or geographical area
  • When it enters bids on new contract work

Analysis of the pricing situation provides useful information for pricing new products.

Additional considerations in deciding about prices include:

  1. Determining price flexibility
  2. Deciding how to position price relative to the cost
  3. Deciding how visible to make the price of the new products
  4. Establishing price policies and structure

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Pricing approaches for new products include:

  • High-active
  • High-passive
  • Low active
  • Low passive strategies

Variations within the four categories occur. The many industries, marketing managers establish prices followed by other companies in the industry. 

Several special pricing considerations include price segmentation, distribution channel pricing, product lifecycle pricing, and price and quality relationships. The determination of specific prices may be based on cost, competition, and/or demand influences.

Who is responsible for new product introductions?

Who is responsible for new product introductions

The responsibility for new product introductions generally falls on the marketing or product development teams within a company. 

It is up to these teams to come up with a pricing strategy that will be profitable and competitive in the market. They must also ensure that the product is well-designed and manufactured to meet quality standards.

What are the problems with pricing new products to watch for?

One common problem with pricing new products is that companies can incur losses if they set the price too low. 

Another issue is that if the price is too high, customers may be unwilling to purchase the product. It’s also important to consider the cost of goods sold and ensure that the price of the product covers all associated expenses. 

Failing to do so can lead to financial losses for the company.

The Six-step Procedure for Setting New Product Pricing

Six-step Procedure for Setting New Product Pricing

The company has to consider many factors in setting its pricing policy. Here’s a quick six-step procedure for setting price pricing for new products.

  1. Selecting the pricing objectives
  2. Determine the demand for sales volume
  3. Estimating cost
  4. Analyzing competitor’s prices and offers
  5. Selecting a pricing method
  6. Selecting the final price point

A good marketing manager will be able to determine the demand, even with the new product activity in the target market. 

How Much Flexibility Exists in Pricing New Products? 

Price elasticity

Demand and cost aspects determine the extent of price flexibility. Within these upper and lower boundaries, competition, among the legal and ethical considerations, may influence the choice of a specific price strategy.

The flexibility range for a price between demand and cost may be narrow or wide. A wide gap suggests a greater range of visible strategies. Exhibit 1 illustrates how these factors determine flexibility.

Choice of a price strategy within the gap is influenced by competitive strategies, future, present, and legal and ethical considerations. Management must determine where the price is within the gap.

In competitive markets, the feasibility range may be very narrow. New markets are emerging market segments in established markets that may allow our firm substantial flexibility in strategy selection.

The price band for a product indicates the amount of flexibility and pricing compared to the competition.

 It is a function of:

  1. Competitive intensity
  2. The value of the brand as perceived by buyers

Commodity-type brands have a narrow price band.  Since buyers consider all commodity brands to be equivalent, they will move to the lowest price offered for a commodity item.

Price Positioning and Visibility

A key decision and how high to price a new product within the flexibility band. Companies can charge a relatively low entry price to build volume and market position or set a high price to generate large margins. The former is a penetration strategy, whereas the latter is a price skimming strategy. A lack of knowledge about previous market responses to the new product complicates the pricing decision. 

Several factors may affect the choice of a pricing approach for a new product, including:

  • The cost and the estimated lifespan of the product
  • The estimated responsiveness of buyers to alternative prices
  • Assessment of competitive reactions

A decision should also be made about how visible the price will be in promoting the new product. Using a low entry price requires active promotion of the price to gain market position. 

When companies use a higher price relative to cost, the price often assumes a passive role in the marketing of the new product and market penetration. Instead, the performance and other attributes of the product are stressed in the marketing program positioning strategy.

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Price Policy and Price Structure 

Determining your price flexibility, positioning price against the competition, and deciding how to activate the marketing component in the marketing programs is also necessary to determine policies and price structure. This does not establish the operating guidelines necessary for implementing price policy.

Price is a focal point of the company’s positioning strategy. Anytime more than one product is involved, the company must determine product mix and line pricing into relationships to establish price structure. 

And when more than one target market is involved, the relationships exist between the products offered in each? Assuming difference in products, should the price be based on cost, the demand, or competition?

Price structure considers how individual items in the product line are priced in relationship to one another. The item may be aimed at the same target market or different user groups.

For example, department stores often offer economy or premium product categories. In the case of a single product market, price differences among products typically reflect more than variations in the cost.

Supermarket chains price for the total profitability of the product offering rather than for the performance of individual items. These retailers have developed computer analysis and pricing procedures to achieve sales, market share, economies of scale, and profit objectives.

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Once product relationships are established, some basis for determining price structure must be selected. Many firms base price structure on the market and competitive factors, and differences in the cost of making each item.

Some use multiple criteria for determining price structure and have sophisticated computer models to examine alternative pricing schemes.

The following guidelines are used in pricing a product line:

  1. Price each product about all others, noticeable differences in products should be equivalent to perceiving value differences
  2. The top and bottom prices in the line should be priced to foster desired buyer perceptions
  3. Price differences between products should become larger as price increases over the product line

Most approaches include not only cost considerations but also demand and competitive concerns. For example, industrial equipment manufacturers sometimes price new products at or near cost and depend on sales of high-margin items such as supplies, parts, and replacement items to generate profits. The important consideration is to price the entire product mix and line to achieve price objectives.

Now let’s explore the price strategies in more detail.

Competitive Strategy and Positioning 

Competitive Strategy Positioning 

The choice of a price strategy depends on how management decides to price the product relative to the competition. And whether price performs an active or passive role in the marketing program. The use of price as an active or passive factor refers to whether prices are discussed in advertising, direct selling, and other promotional efforts.

Many companies choose to price at or near key competitors’ prices, and non-price factors are emphasized in their marketing strategies.

High Active Strategy and Price Strategies for New Products

This strategy is sometimes used for prestige brands seeking an affluent image. These companies can charge a premium price. When the buyer cannot easily evaluate the quality of a product, the price can serve as a signal of value. These companies can charge a premium price. 

High prices may be essential to gain the margins necessary to serve small target markets, produce high-quality products, or pay for the development of new products. 

Making price visible and active can appeal to buyers’ perceptions of the quality, image, and dependability. A company using a high price strategy is also less subject to retaliation by competitors, particularly if its product can be differentiated.

 High Passive Strategy

High price items are more often marketed by featuring non-price factors rather than highly active strategies. Product features and performance can be stressed when the people in the target market are concerned with product quality and performance.

Low Active Strategy

Many retailers use a strategy, including Lowe’s, Dollar General stores, and Payless Shoes. A low active price strategy can be very effective when a price is an important factor in buyers’ decisions. 

However, this strategy may start a price war. And it is a more attractive option when the competition for the target market is not heavy. Or when a company has caused advantages in a strong position in the product market.

 Low Passive Strategy and Price Strategies for New Products

This strategy may be used by manufacturers whose products have more low-cost features than other suppliers. By not emphasizing low prices, the company runs less danger that potential buyers will assume the product quality is inferior to other brands. 

Some firms participating in conventional channels may not spend much on marketing their products and may offer low prices because of lower costs. Other companies with actual cost advantages for comparable competing products may decide to stress value rather than price while offering prices lower than competing brands.

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Wrap-Up about Price Strategies for New Products

The strategic importance of price demonstrates how products, distribution, price, and promotion strategies will fit together into an integrated strategy of program positioning. 

Analyzing the pricing situation is necessary to develop a price strategy for a product mix or product line or to select a price strategy for a new product or brand. Underlying strategy formulation is several important strategic activities, including analysis of the product market, cost, competition, and legal and ethical considerations.

These analyses indicate the extent of price flexibility. Price strategies are classified according to the company’s price relative to the competition and how active the promotion of price will be in the marketing program. 

Pricing decisions for new products should consider price positioning alternatives and how price may be used as an active element in the marketing program. Price policies and structure must also be determined for new products.

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FAQs about Price Strategies for New Products

What is skimming, and how can it be used to price a new product?

Skimming is a pricing strategy in which a high price is set for the initial release of a new product in order to maximize profits.

What is penetration pricing, and when is it appropriate?

Penetration pricing is a pricing strategy in which a product is offered at a lower price to attract more customers and boost sales in the short term. It is typically used when a company faces stiff competition from other brands.

How does the cost of goods sold impact pricing decisions?

The cost of goods sold is a key factor in pricing decisions for new products. It is important to ensure that the price of the product covers the cost of manufacturing and distributing it, as well as making a profit. If the price is set too low, the company may not be able to cover its costs, and if it is set too high, customers may be unwilling to pay.

What are some common mistakes made when pricing new products?

One common mistake is setting the price too low, leading to losses in the long run. Another mistake is pricing the product too high, which can make it unattractive to consumers. It’s also important to consider the cost of goods sold and ensure that the price of the product covers all expenses. Not taking these factors into account can lead to financial losses.

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