As a business owner or organizational leader, you know that the ideal prices can yield big profits. By pricing your products “properly”, you can reach more customers, sell more units, and ultimately make bigger profits. However, knowing the importance of the right pricing is not the same as actually getting it right. This is especially true for new products.
Many companies struggle to appropriately price their new products. If they charge too much, the product might not sell. But if the price is too low, it could result in huge losses – even if sales are high due to the low price. In fact, one McKinsey study found that charging just 1% less than the “optimal” price can result in an 8% drop in potential profit!
So how can you appropriately price your new products to maximize revenues and profits? Here are some ways.
Establish a Price Ceiling
If your product is not a me-too product but offers revolutionary or evolutionary customer benefits, you can maneuver with the price by setting a price ceiling based on these benefits, and how customers perceive them.
To understand these perceptions, conduct market research. Make sure that it elicits more open-ended feedback, so you understand how many potential customers value your product’s benefits. For this, leverage marketing tools like conjoint analysis with real-life scenarios and perceptual mapping.
Conjoint analysis is a good way to determine a customer’s willingness to pay more. Present respondents with a list of features they might want in your “ideal” product while considering price as a factor in their final decision. So, for a given price, if they choose Feature 1 over Feature 2, it indicates that they prefer Feature 1, so you can assign a value to this feature, and use it to guide your pricing strategy.
Perceptual mapping is another powerful tool that can help guide your pricing decisions. With this two-dimensional map, you can understand what attributes matter to customers after they have experienced a product. Place two of your product’s key attributes on each scale (X and Y) of the map. Then ask respondents to place your product on the map concerning those attributes. Their answers will be qualitative, but you can quantify them using a scale, such as the Likert Scale.
Try Cost-Plus Pricing
Cost-plus pricing is a good strategy to price your new product if you already know its production costs or if the product is utilitarian in nature. It’s also an easy way to set prices, since it’s easy to calculate, and involves little research into competitors’ pricing strategies or consumer demand trends. It also requires no market research, so you can leverage the strategy with very few resources.
Simply set the price by calculating the unit cost, and adding a margin to it. Here, the margin is your target rate of return. Every unit sold will yield the same revenue and a consistent rate of return to cover your costs and help you achieve your profit margin.
This strategy works best if you:
- Consider all production costs, including those that are not immediately obvious (e.g., R&D expenses)
- Accurately analyze the cost per unit based on the total production cost and units produced
- Determine the margin that represents a minimally acceptable return on investment
Once you know these data points, you can determine the new product’s lowest reasonable price level or price floor, and then adjust it based on whether the market can bear it.
Consider Penetration Pricing
Penetration pricing can be a good way to quickly build market share for a new product. This strategy can work well when:
- The market is underdeveloped or new
- There are no established product standards or similar products
- Customers are really price-sensitive
- Your product offers tangible and significant benefits that competitors can’t match
- You expect your “cost-to-serve” to decline over time as you achieve economies of scale, your variable cost per unit falls, and your margins rise
By keeping the price as low as possible, you can quickly build a presence in your target market. Do this before competitors tap into latent demand and even create new demand. You can then expand your share, and gain an early competitive edge by establishing yourself as the market leader.
Just remember that this strategy can be harmful in the short term if your prices are lower than production costs because you might end up taking a hit on profits.
Also, if your customers are not price-sensitive, their choices may get influenced by the product’s features or benefits, rather than price. In this situation, penetration pricing can be catastrophic, because your prices will be lower than they need to be, so you will end up forfeiting a huge chunk of profits.
Some More Potential Pricing Strategies
Here are three other pricing strategies to consider to price your new products:
- Loss leader pricing: A slightly risky pricing approach where you sell your product slightly below cost to attract customers who could – in theory – make up for the loss by purchasing other profitable products
- Anchor pricing: Price a product and then visibly lower it to “show” customers that they’re getting a great deal
- Competitor-based pricing: If a competitor offers a comparable product, use their price as an initial gauge to set your prices
Product pricing is both a challenging and critical strategic decision for your company. To get it right, it’s vital to understand the benefits of your own product. Only then can you communicate its value to customers, and accordingly set a price that’s acceptable to you both. It’s also important to define your pricing objectives, perform credible market research, do accurate cost analyses, and understand the customer landscape to guide your decisions.
If you have a budding brand, figuring out the best pricing strategy for your products, it’s best to contact experts. Ergode empowers many eCommerce companies to accelerate their growth with the right pricing and sales strategies. Connect with us to know more.