The new product may be either an entirely new one or it is one of the varieties of the existing products. If there are many substitutes for the new product in the market then competitive price will be charged. If the product is entirely new then through the process of trial and error the price will be fixed not only to cover the cost of production but also to cover the cost of promotional strategy. Two types of pricing methods are adopted in pricing of a new product.
- Skimming Price: In case of skimming price the producer makes an effort to fix the price in such a way to skim away the consumers’ surplus i.e. the firm learns about the maximum possible price which the consumer will be prepared to pay, rather than go without the commodity, and then quotes the price accordingly. This price may be much above the cost of production. The high price is accompanied by heavy sales promotion practices. Gradually the firm brings down this price. The time and size of the price reduction has to be proper. As long as the product is able to maintain its distinctiveness the firm continues with the skimming price policy. This policy is successful because in the initial stages when the new product is introduced in the market the demand for it is relatively inelastic and therefore the firm resorts to skimming price.
- Penetration Price: Penetration Price policy implies that the objective of the firm is to get into the market as early as possible even when there are other substitutes and therefore considerately low price is charged. When the product is able to acquire greater demand and capture bigger markets then the prices will be gradually raised.