We talk a lot about the search for new products and how important it is to have new products within a product portfolio. It is a fundamental determinant of a new product’s success to conduct pricing research and to formulate the right pricing strategy. Here are some strategies that could be considered.
Arguably, this is the most appropriate pricing strategy for all companies in which it is determined what consumers will pay for a product and what attributes of the product they value. In business to business marketing, value pricing usually implies that a company is seeking a premium for the many benefits that the product offers. In consumer markets, value pricing implies a cheaper and often own brand alternative to the better known brands.
If the aim is to achieve a large market share in the shortest time possible, it is likely that a low and very attractive price will be required. This is a strategy that is most appropriate for price sensitive products or where there is an aim to keep out the competition. It would also be valid where costs are highly volume dependent and where low costs can only be achieved if there is a large output. Chinese companies looking for volume outlets for their products would typically use this approach.
In contrast to market penetration is the concept of market skimming in which, as the name suggests, cream is skimmed from those people who are prepared to pay a premium price. This strategy works well when a product is novel and has high appeal to the innovators who want to be the first to buy the new technology and can afford to do so. It is a strategy more typical of American-based companies – the best example being the high initial price of the Apple iPhone and iPad before the competition has had the chance to ramp up.
Under marginal cost pricing the fixed costs of producing the product are ignored and prices are determined on the basis of the marginal cost of the product. For example, a hotel whose guests are mainly business people during the week may offer very attractive deals for rooms at the weekend when they have an overhead that they are going to have to pay whether the rooms are empty or full. As long as the price of the room covers the cost of servicing the room, a profit can be made.
Many business to business products are extensions to existing product lines and will have some interdependency with their sibling products. In such cases it is necessary to charge a figure which is in some way comparable to the other products in the lineup. Typically a small premium is charged for the new and (improved?) product.
Occasionally, a company will place a price on a product simply to get it noticed by the consumer. The wine companies and the supermarkets often feature a product with an odd price to capture our attention and draw us into the other products which are on sale.
For most of us there is an intuitive belief that we get what we pay for. Therefore, if a product has a low price we might assume that it is also low quality, and vice versa. Most of us have a reference point in our minds which suggests a pricing norm. Using this psychology some companies manipulate the reference points to determine their pricing strategy. It is very typical in the wine and luxury goods industries.
Companies may charge different prices depending on the location of the customer. Companies supplying ready mix concrete are essentially in the transport business with a “live” produce and would charge a customer a quite different price if they are located far from the mixing plant. Some companies charge different prices in different countries.
Sometimes a new product has only a small window in which it can take advantage of the market. A patent or license expiry date may mean that after a certain time the market could be flooded with product lookalikes. It may also be that cash flow problems demand that there is a quick return on investment. In essence, cash recovery pricing is an aggressive form of price skimming.
Here, the firm decides the target return that it expects from the product and uses this to determine the price. As a refinement of this and where a significant investment is involved, a minimum return on capital may also be demanded with a predetermined payback period.