Pricing Strategy for New Products

An essential factor that impacts a company’s revenue is the price. It serves as the primary determinant in the financial modelling of the business and has a long-term effect on its revenues, earnings, and investments. Price reveals a company’s idea, how it deals with competitors, and how much importance it places on its customers.

Pricing strategies are generally used by businesses to determine how much they should charge for their products and services. When pricing products, it is necessary to consider the relationship between margin, price, and selling level. Therefore, creating an effective pricing strategy that promotes business success is both needed and challenging.

These strategies usually change as a product goes through its life cycle. The initial phase is very challenging as it can be difficult for companies to determine the price when they release a new product. They have two primary pricing methods to choose from: market-skimming pricing and market-penetration pricing.

New Product Pricing Strategies

Deciding on the price of a new product can be a challenging task. The decision to set a price becomes more challenging when there are fewer concepts for the product. Due to the size of the uncertainties involved, pricing a new product is more difficult than pricing a mature product. When it comes to introducing new products, there are many uncertainties involved. Setting a price for a new product can be a difficult task, especially without conducting extensive market research to determine consumer expectations through surveys or test market data. Market information on quantities demanded at different prices can be produced by using test markets.

Penetration and skimming pricing are two popular methods for new product pricing which include different marketing objectives and marketplace conditions.

i) Market-Skimming Pricing

Price skimming is a pricing technique that businesses use when they introduce new products. In this strategy, a business launches a product with a high price and then gradually lowers the price over time to quickly recover the cost of the product. Since they are the first to introduce or promote the good or service, they have the first-mover advantage. Prior to the entry of new competitors and the expansion of supply, the skimming pricing strategy generates profits in the early phases of the market for the good or service.

For instance, smartphones with extra features at higher pricing, are followed by a gradual decrease in those prices over time. Another example of price skimming would be the current market for 3D televisions.

ii) Market-Penetration Pricing

When a business sets a lower initial price for its products or services in order to attract more customers and gain a larger market share, it is called penetration pricing. It’s possible that the price is so low that the seller cannot earn a profit. The seller, though, is not irrational. This strategy aims to convince clients to switch to a new product by offering it at a lower price. Penetration pricing is frequently used for helping the launch of a new product. It works best in markets where demand is price elastic and there is little to no product differentiation. The ability of the company to absorb the losses incurred in the earlier years is a major factor in the penetration pricing strategy. This is mainly used by large MNCs to establish an established position in the marketplaces of developing nations.

For instance, When Netflix first entered the market, it offered a free monthly subscription. However, it later discontinued this offer and raised the prices for its monthly subscription.

Price Adjustment Strategies: In case there is an existing product, a company can use different Price Adjustment Strategies to price their products.