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?