Methods of pricing a new product

We will address the following questions after new product development:

  • How should a company price a new good or service?
  • How should the price be adapted to meet varying circumstances and opportunities?
  • When should the company initiate a price change, and how should it respond to competitive price changes?

In the entire marketing mix, price is the one element that produces revenue; the others produce costs. Price is also one of the most flexible elements: It can be changed quickly, unlike product features and channel commitments. Although price competition is a major problem facing companies, many do not handle pricing well. The most common mistakes are these: Pricing is too cost-oriented; price is not revised often enough to capitalize on market changes; price is set independent of the rest of the marketing mix rather than as an intrinsic element of market-positioning strategy; and price is not varied enough for different product items, market segments, and purchase occasions.

The different methods of pricing can be grouped under the following categories:-

  • Cost based pricing
  • Demand based pricing
  • Competition-oriented pricing
  • Differential pricing
  • Going rate or “Follow the crowd”

The different pricing methods are explained in detail as follows:-

1. COST-BASED PRICING

Under this category, only one approach has been taken into consideration i.e. Mark-up pricing / Cost plus pricing.

Mark-up Pricing refers to the pricing method in which the selling price of the product is fixed by adding a margin to the cost price. The mark-ups vary depending on the nature of products & markets. Usually, the higher the value of the product (unit cost of the product) the larger the mark-up & vice-versa. Again, the faster the turn round of the product, the smaller the mark-up vice-versa.

2. DIFFERENTIAL PRICING

Some firms charge different prices for the same product in different zones / areas of the market. Sometimes, the differentiation in pricing is made on the basis of customer class rather than marketing territory. Sometimes, the differentiation is on the basis of volume of purchase. Differentiation on the basis of volume is more common than differentiation based on customer class in marketing territory.

3. GOING RATE OR “FOLLOW THE CROWD”

In this method, the firm prices its products at the same level as that of the competition. This method assumes that there will be no price wars within the industry. This is a method commonly used in an oligopolistic market. Despite its advantage of preventing price wars, the method suffers from serious limitations. The first is that, it is not necessarily true that all firms or the leader firm is operating efficiently. In case, it is not, it will mean that the follower firm will also adopt a price level which reflects leader’s inefficiency rather than the firm’s efficiency. Besides, it is not always true that a decision taken in collective wisdom is the best. It may certainly not be so from the customer’s point of view.

4. DEMAND / MARKET BASED PRICING

The following methods belong to the category of demand / market based pricing:

  • ‘What The Traffic Can Bear’ Pricing
  • Skimming Pricing
  • Penetration Pricing

The basic feature of all these demand based methods is that profits can be expected independent of the costs involved, but are dependent on the demand.

‘What the Traffic Can Bear’ Pricing

As per pricing based on ‘what the traffic can bear’, the seller takes the maximum price which the customers are willing to pay for the product under the given circumstances. It is not a sophisticated method. It is used more by retail traders than by manufacturing firms.

Skimming Pricing

Skimming Pricing aims at high price & high profits in the early stage of marketing the product. As the word skimming indicates, this method literally skims the market in the first instance through high price & subsequently settles down for a lower price.

Penetration Pricing

Penetration pricing, as the name indicates, seeks to achieve greater market penetration through relatively low prices. It is the opposite of skimming pricing. This method too is quite useful in pricing of new products under certain circumstances.

5. COMPETITION ORIENTED PRICING

In several industries, competition oriented pricing methods are followed. The methods under this category rest on the principle of competitive parity in the matter of pricing. Competition based pricing, or competitive parity pricing does not, however, mean exactly matching competition.

Three policy alternatives are available to the firm under this pricing method:

  • Premium Pricing
  • Discount Pricing
  • Parity Pricing / Going Rate Pricing

Premium pricing means pricing above the level adopted by competitors; discount pricing means pricing below such level; and parity pricing means matching competitors pricing. Where supply is more than adequate to meet demand & the market remains competitive in a stable manner & where the channel & consumers are well aware of their choices, parity pricing may be the answer. Similarly, when a market leader has established a market price with the intention of stabilizing the price, the smaller firms in the industry may have to go in for parity pricing.

Recommended reading: Stages of new product development

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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One Comment

  1. Thanks for the info. So much clarity as compared to lecture notes and certain books. A clear example of “short and sweet”.

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