Pricing New Products

Companies habitually charge less than they could for new offerings. It's a terrible habit.

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.

This article forms some of the content in The Price Advantage, by Michael V. Marn and Eric V. Roegner, principals in McKinsey’s Cleveland office, and Craig C. Zawada, a principal in the Pittsburgh office.

Launch Position

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.

Discuss

Your email address will not be published. Required fields are marked *