I will describe a strategy for determining a price for the latest product; you can say pricing strategy for the new product.
Before reading further, I just want to inform you about previous articles which are related to pricing.
Below are the related articles:
- Close relation between pricing and marketing
http://marketingforbeginner.blogspot.com/2016/01/pricing-in-marketing.html - Pricing objectives
http://marketingforbeginner.blogspot.com/2016/01/pricing-objectives-goal-of-pricing.html - Price determination consideration that Marketer must know
http://marketingforbeginner.blogspot.com/2016/01/price-setting-considerations.html - Factors that affect price setting
http://marketingforbeginner.blogspot.com/2016/01/factors-that-affect-price-determination.html - Basic Theory of Pricing
http://marketingforbeginner.blogspot.com/2016/02/price-setting-method.html - Markup pricing for Beginners
http://marketingforbeginner.blogspot.com/2016/02/markup-pricing.html - Strategy for competitive pricing
http://marketingforbeginner.blogspot.com/2016/02/competitive-pricing.html - Customer-driven pricing
http://marketingforbeginner.blogspot.com/2016/03/customer-oriented-pricing-method.html
Let's start reading and continue for the pricing strategy for the new product article.
There are six circumstances that every profit-oriented organization (company) must determine a price, they are:
- Launching a new product
- Introducing a new product to distribution channel or new market or new area
- When performing auction in new contract
- Facing a market change
- Responding a competitor
There are four conditions that are concerned when you set the price, they are:
- New product
- Established product
- Market psychology
- Competition environment
As I mention above, in this article I explain point number one: how do you set a price for a new product, Lists of strategies for pricing a new product, and detail explanation about these strategies.
Important things in determining a price for new product:
- This pricing must give a good effect on market growth.
- This pricing can prevent the emergence of price competition.
According to Fandi (1997), three pricing strategies for launching a new product are:
- Skimming pricing
- Penetration pricing
- Initial pricing
Now, I want to explain these policies one by one.
Pricing strategies when you set a price for the new product
1. Skimming Pricing
Skimming pricing is determining a price with a maximum price (high price) to get maximum profit.
Ideal conditions when implementing skimming pricing are:
- You can efficiently perform skimming price when it supported by intense promotion.
- When you launch a product with the newest or the latest technology.
- When you face uncomplicated competition or almost no competition.
- You have a highly unique product, and people really like this product.
- You have a target market who have a high income, and they are not price sensitive.
- Your target market has an awareness that high price reflects high quality and for exclusive people.
- Your product is very innovative and needs a long time before it is established and mature in PLC (product life cycles).
Goals of skimming pricing strategy
Mostly, every company which runs skimming pricing strategy has several goals. The goals are:
- Serving people who are not price sensitive and individuals who have a high income.
- Covering promotion cost, research cost, and another cost.
- Controlling a product demand so that the demand doesn't exceed the production capacity.
- Preventing a price fallacy
Why does the skimming pricing strategy can avoid a price mistake? Because it is easier lowering the current price (a price which is perceived too expensive by a consumer) than raising the current price.
2. Penetration pricing
Penetration pricing is setting as lowest as possible for obtaining the highest sales volume of the particular market segment.
Frequently, penetration pricing strategy is implemented when the company launch a new product or in the very beginning phase at PLC (product lifecycle phase).
The goals of implementing penetration pricing
- Getting higher market share
- Preventing competitors entering your market
- Obtaining economies of scale
- By sacrificing short-term profits, excellence business performance can be achieved
The ideal conditions when performing penetration pricing
- When facing a tight competition
- When saturation market has occurred
- When product appeals the market
- When you have a target market which is price sensitive
- The lower price can prevent new competitor enter your market
- When production cost and marketing cost decrease along with increasing of production volume
Things must be concerned with penetration pricing strategy
- The company must have sufficient resources to survive with loss in the beginning operational
- Must serve price sensitive people
- Big market is potential opportunities to catch
- High demand elasticity
Benefits which will be got from implementing penetration pricing strategy
- By sacrificing for minimum profit at the beginning, the company will create and enlarge the market
- There is a barrier to entry from new competitor to enter the market
- With big market, high sales volume will be achieved
The types of penetration pricing
There are four types of penetration pricing, they are:
- Restrained price
Restrained price is a price which has set for sustaining certain price level during inflation. - Elimination price
Elimination price is a price which has set at the particular level that can cause competitors exit from the competition. - Promotional price
Promotional price is a lower price with the relatively equal quality for promoting the product. - Keep-out price
Keep-out price is a price which is set for preventing a competitor enter the market.
3. Initial Pricing
There are two types of initial pricing strategy, they are:
- Premium price
Price is relatively expensive for creating a prestige, exclusive, and superior status. - Umbrella price
The company keeps a high price to protect small competitors. Usually, it is supported by government regulation that determines minimum price for a product.
Summary
- When you launch a new product, when you face the difficult competition, when you introduce a new product to the new market, when market changes, you must determine an appropriate price.
- When you decide a price, there are two types of product you must concern. They are: new product and established product.
- When you determine a price, there are two types of situation you must concern. They are competition environment and psychology of a market.
- There are three pricing strategies for launching a new product; they are skimming pricing, penetration pricing, and initial pricing.
- Each strategy is implemented in different condition, different target market, time, and situation.
- Every pricing strategies have several goals and benefits for business performance.
