Competitors' reactions
Especially for evolutionary products, a low price that noticeably shifts market share will probably trigger a destructive price war: competitors usually can't react immediately by improving the benefits of their own products, so they often cut prices instead.6 A higher reference price, by contrast, suggests that a company is targeting profits rather than market share and might therefore generate few if any immediate reactions from competitors.
Life cycle strategy
If an early-adopter segment is willing to pay a premium for a product, the company that makes it may wish to consider a high release price to capture the extra value, with planned reductions down the road to attract latecomers. Along with capturing more revenue over the life of a product, this strategy can also help companies match demand to production capacity for a new product.
Cannibalization
Companies must also carefully consider how new wares will affect their current ones. If an older product remains viable, a company might try to manage the cannibalization problem by giving its new product a higher release price targeting a smaller segment of customers. By contrast, if a product line is being retired, a lower release price for a new offering may be appropriate to shift customers to it as quickly as possible.
Going to market
Presenting a price to the market requires both astute communication with it and patience. It can be especially hard to explain the value and benefits of revolutionary products to often-skeptical buyers, but whatever conditions a new product may face, a faulty pricing strategy shouldn't be allowed to undermine its value message.
A product's fortunes during the first six months to a year after it hits the market have a critical influence on its value position. Especially during this period, companies must keep firm control of their pricing operations, all the way down to individual transactions. For instance, discounting, which could be routine for continuing product lines, might sabotage a new product's reference price.
If managers must push a product quickly, however, they can do so without sacrificing its reference price or the market's perception of its value. One common technique is to offer consumers free samples or to give the product to small groups of customers with a high profile or significant market influence. Another is to offer it to customers for a free-trial period. Both approaches speed up the market penetration of the product without cutting the reference price. Standard discounts or rebates are usually a mistake, however, since they do cut it and also provoke doubts about the product's benefits.
The answers to questions about the price of new products can't wait for the end of the development cycle; the questions are an intricate part of the process of developing them, and the answers are needed to assess their ultimate profitability. At present, companies routinely overlook the higher reaches of their pricing potential. Basing release prices on credible market research and cost analysis can give managers the confidence to ride out the initial turbulence that usually surrounds new products and to claim their true value.
A critical step -- and often the first stumbling block -- in releasing a new product is to understand its true nature. Whatever its price category, it hits the market in one of three positions.
- Revolutionary : A product is so new that it creates its own market. Quantifying and explaining such a product's benefits to an untested market takes skill.
- Evolutionary : Upgrades and enhancements to existing products are evolutionary in nature. If the new product provides too many new benefits at too low a price, a price war can ensue.
- Me-too : Painstaking cost analysis and a clear set of target customers are needed to avoid catastrophe with me-too products, which bring a company into line with the rest of the market without adding new benefits.
Too often, companies overplay the benefits of their new products, touting as revolutionary what is at best evolutionary and rarely acknowledging that they are really playing catch-up. But it is important to make an honest internal assessment of a product's position, since different pricing strategies are appropriate for each of the three possibilities.
With every new product, companies feel tempted to build market share quickly through aggressively low prices -- a tactic known as penetration pricing. But a fixation on volume usually sacrifices profitability and may ignite a price war. As a result, it is generally better to keep upward pressure on prices and to promote good industry pricing behavior. On rare occasions, however, the price lever may be the right tool to undercut competition.
