Best New Product Pricing Practices

One of the most challenging tasks a marketing organization will face involves setting the "right" price for a new product.  New product pricing is complex. It is important to use a process that breaks down the task into manageable elements.  An effective process will integrate these elements while reducing risk and increasing confidence in the important decisions to be made.

Some elements to consider are:

• Start early to understand value.
• Perform customer value research.
• Get the right competitive price positioning.
• Manage the portfolio.
• Understand value segments.
• Take a hard look at product costs.
• Forecast revenue and profitability.
• Don't ignite a price war.

Understanding value. Understanding value from the perspective of the customer is central to pricing new products. Customer needs should be researched and included early when concept ideas are being created. Knowing customer needs allows you to answer the important questions: What features do customers value, and are they willing to buy?   Avoid the mistake of making a substantial investment in a product that has little chance of success.

Perform customer value research. Product design, competitive positioning, and pricing all require a systematic approach to understanding customer needs and perceived value. Customer Value Research encompasses both qualitative and quantitative research methods for understanding customer perceptions. Marketing professionals readily accept the idea that price should be based on product value versus cost. The challenge is to set a product price that accurately reflects customer's perception of value.

Quantitative research employs statistically valid methods to quantify price sensitivity of the new product in relation to both the competition, as well as the product portfolio.  These techniques are used for evaluating the trade-offs customers would make between features, brands and price.

Quantitative research will answer questions such as:

• What price-to-unit-volume relationships (price elasticity) can be predicted under a range of market and competitive scenarios?
• What is the expected price elasticity and the optimum price strategy?
• What is the monetized value of my brand?
• To what extent will the new product cannibalize my current products and my competitors' products?
• What industry segments or world areas will support premium prices?
• Can I use pricing as a strategic weapon to gain the upper hand in the marketplace?

Qualitative research put color on the illuminate questions such as:

• What product features are most valued by the customer?
• What barriers will limit successful entry into the market?
• What is the likely acceptance of various price ranges?

Armed with quantitative and qualitative research, you can better develop the right competitive price positioning. Competitive positioning recognizes that purchase decisions are not made in a vacuum and  for very new products, the competitive alternative is often not a product, but instead an alternative solution.

Manage the portfolio. Use the quantitative data (cross price elasticity) to minimize  cannibalization.  Don’t make the mistake to release a new product that cannibalizes a more profitable product.  Understanding the power of cross price elasticity will keep you from shooting yourself in the foot. Take advantage of the product introduction to optimize the positioning of all products in the portfolio.  For example, adjusting prices of both the new product and existing products can be used to control a desired adoption rate; drive customers to the most profitable products or overall migrate customers to more expensive products.

Understand segmentation.  Research frequently identifies distinct groups of customers having differing value perceptions for the product, and different willingness to pay.. A solid understanding will help you define custom product solution packages, as well as to define price structure and discount management policies to optimize your revenues, profits or market penetration. An important questions to answer is: How should the product be priced when one segment is willing to pay a higher price versus another segment? The hard research data will tell you.

Don't start a price war.Company stakeholders in the product will often make the judgment that their new product has a higher value relative to the competition.  And yet, they frequently set a price at parity or below the competition. This price positioning can upset industry equilibrium and ignite a price war. A competitor that can't compete on value will attempt to defend market share by lowering price.  The results can be disastrous for all players in the market.