New Product Pricing Strategies

Many organizations large and small face challenges when they are about to launch a new product or service.  Many small business owners will underestimate their product/service and will provide significant discounts to attract customers.  This strategy could be deadly because it is very hard to increase prices rather than reduce prices.  Larger companies spend a great deal of resources on product research, development and production.  In order to be successful they need to at least recover these costs and hopefully generate profits.  Whether the organization is small or large located on Rodeo Drive or a small mid western town they need to ask "How much is the consumer willing to pay?"  To help with this question two new product pricing strategies exist.

First, market skimming calls for the company to set high initial prices to "skim" revenues layer by layer from the market.  Sony used this strategy when they introduced the first HDTV.  This new product was purchased by customers who really wanted the advanced technology and had the means to afford it.  Sony had no intentions of mass production during these initial stages because they new the majority of the market was not ready for such an advanced product.  For this strategy to work the following conditions need to be in place.

1) Product quality and image must support its high price and enough buyers must want it at that price
2) Costs of producing small volume quantities of the product cannot be so high that it cancels out the advantage of charging more
3) Competitors should not be able to enter the market easily and undercut the high price

When IKEA entered the Chinese market they faced competition from local store who offered copy cat products at lower prices.  To win this low price competition battle they use the market penetration strategy which helped them to eventually gain a large market share.  With this strategy the higher the sales volume the greater the discount the company can afford to give on its pricing.  IKEA's large and extensive supply chain helped play a significant in this strategy.  To win with this strategy the following conditions must be in place:

1) Market must be highly price sensitive so that a low price produces more market growth
2) Production and distribution costs must fall as sales volume increases (strength of IKEA)
3) The low price must help keep out the competition.  The penetration pricer must maintain its lowest price position in the market.

When pricing be thoughtful of your strategy and take the time to know consumer demand.

Have you ever had a product or service pricing backfire on you? 

How much pie does your company have?

 Today's businesses are competing for their respective market shares to capitalize on the 335 million consumers in North America who spend trillions of dollars annually on goods and services.  Whether it's globally or locally it is a consistent battle for businesses to either maintain or gain their market share in today's economy.  Within a market companies jockey for competitive positions.  For example, here in Canada Tim Hortons is the market leader for fast food service largely due to their significant share of the grab and go coffee market. The primary competitors for Tim Hortons would be Starbucks and McDonalds.  The competitive position of these organizations is determined by the market share they possess in their particular industry. 

There are 4 competitive positions in which a company can be in. These positions are: 
1) Market Leaders 
- Has at least 40% market share 
- The firm with the largest market share and leads the market price, changes and product innovations 
2) Market Challengers 
- Has 30 % market sharen
- Are firms fighting to increase market share 
3) Market Followers
- Has 20% market share 
- Are firms that want to hold onto their market share 
4) Market Nichers 
- Has 10% or less market share 
- Are firms that serve small market segments which are not being pursued by other firms 

Whether a company is a market leader or nicher they must use specific strategies to either drive growth or maintain their market share.  For market leaders this may mean attempts to gain share of the market followers and nichers competitive positions.  A prime example of this is Home Depot who is looking to take market share away from some local hardware stores by opening new retail locations in more rural areas.  These retail locations will be significantly smaller than their typical large box warehouses with the hope of creating a more local and community feel to attract consumers.  Companies like Home Depot are often forced to begin looking at alternative strategies so they do not cannablize themselves and this often means taking away market share from different competitive positions. In this case Home Depot is carving out a bit of niche by forcing  on geographic areas which are typically served by local hardware stores. 

If we continue to look at the home improvement and contstruction retail sector the market challenger for tis group would be Lowes.  A market challenger is looking to increase market share and can do so by: 
1) Second Mover Advanage 
- Obeserves what has made the leader successful and attempts to improve upon it 
2) Full Fontal Attack 
- Matches competitor products, advertising, price and distribution efforts-attacks the competitors strengths 
3) Indirect Attack 
- Targets the competitors weaknesses, taking over gaps in the competitors market coverage 

For those smaller hardware stores in tiny communities in cottage country they to must take action to preserve their market share.  Strategies for market Nichers include: 
1) Specialization 
2) Have a large enough market that provides growth potential and garners little interest from competitors (obviously that is not always possible) 

Knowing where your company falls in regards to competitive position is important because it gives you and your organization a look at what opportunities exist as well as what threats may emerge and poetically impacting your market share. 

Competitive Analysis

Whether you are a small or large business today's global economy requires an ongoing effort to remain competitive.  Those organizations who believe that they have a significant share of the market and feel like there are no immediate threats suffer from competitive myopia, a condition where organizations make the mistake of solely focusing on themselves and not necessarily the market which they are in.  Competitive Myopia can cripple a company and have immediate impacts on their human and financial capital.  To avoid this condition a company must perform regular competitive analysis and evaluate their position in the market. 

When performing a competitive analysis a company will identify, assess and select its key competitors.  Let's have a look at each: 

 1) Identifying the company's competitors

  - here a organization must look at their direct and indirect competitors.

  2) Assessing competitors' objectives, strategies, strengths and weaknesses, and reaction    patterns 

   - here organizations will want perform a SWOT analysis of themselves as well as their 

   competitors.  

  - when performing a SWOT analysis the strengths and weaknesses are an internal evaluation  which can include customer service, retail support and product design to name a few.  While the opportunities and threats are external to the company.  An opportunity can be geographic expansion for the business and a threat could be changes to gov't policy which could potentially limit the company's profits. 

3) Selecting which competitors to attack and avoid 

- companies must be very careful here as they do not want to attack a company who has a superior product or service when compared to their own.  A company should focus attacking companies who they have a clear advantage over in regards to the particular product or service. 

Above is a quick overview of the competitive analysis process which can help organizations avoid losing share of the market. In my next post I will review what the 4 competitive positions are and which strategies each position uses.