FE Today Logo

Determining the price of a new product?

Md. Tajul Islam | September 19, 2023 00:00:00

Pricing is a fundamental element of any business strategy, playing a pivotal role in determining a company's success or failure. It's not merely about assigning a number to a product or service; pricing is a complex and strategic decision that has far-reaching implications.

Pricing is crucial in business as it directly impacts profitability, customer perception, market competitiveness, and revenue generation. Setting the right prices ensures sustainable growth and effective market positioning. In the case of new products, two strategies are usually followed: one is skimming pricing, and the other is penetration pricing. Skimming product pricing is a strategy where a company initially sets a high price for a new product and gradually reduces it over time. This strategy is often employed for innovative or unique products, especially in the early stages of their introduction to the market.

The primary goal of skimming pricing is to target early adopters and customers who are willing to pay a premium for new technology or features. When a mobile phone manufacturer introduces a new smartphone to the market, they initially set a higher price. Over time, however, the price gradually decreases. Apple always follows the price skimming strategy when launching new iPhone models. They introduce iPhones at a higher price point, targeting early adopters and loyal customers, and then gradually reduce prices as the product's lifecycle progresses.

There are many advantages of skimming pricing. First, skimming pricing allows companies to capture the most profit from customers who are willing to pay a premium for the latest innovations. Secondly, high price indicates the quality of product. Some people think that high price means the better quality of the product. Also initial high prices can provide funds for further research, development, and marketing efforts. By using this fund they can innovate and launch more high quality product with amazing features.

Another strategy of new product pricing is penetration product pricing which involves setting a low initial price for a new product to quickly gain market share. This strategy aims to attract a broad customer base from the start and establish a strong presence in the market. Over time, prices may be adjusted upward, and complementary products or services may be introduced to boost revenue. Xiaomi have used penetration pricing for smartphones to establish themselves in competitive markets. It has many advantages.

Penetration pricing helps companies rapidly gain market share, which can be crucial in competitive industries. Secondly, lower prices attract cost-conscious consumers and encourage them to try the product or service. It also helps in brand recognition, establishing a presence in the market early on.

Now the question is-- which is a better strategy for new product pricing? Actually the choice between price skimming and price penetration depends on factors like the product, competition, and business goals. Price skimming starts with high prices for early profit, while price penetration uses lower prices to quickly attract a wider customer base. Your decision should match your specific circumstances and objectives.

Md. Tajul Islam is a student, Department of Marketing, Islamic University, Kushtia. [email protected]

Share if you like