Choose a Pricing Strategy For Your New Product

A price is everything a customer would have to give up in exchange for a product or service. It is usually expressed in a currency, such as Pound Sterling, Euros or US Dollars. It can be effected by a number of things, but the most common factors are the cost of production, competitor's prices, customer demand and the state of the economy. But how do you price a new product?

If your product is entirely unique and new to the market, you have two strategic options. The first is called Price Skimming. This is when you set a high price to maximise profit, in order to recover as much research and development cost as possible. When demand begins to fall, you lower the price to appeal to the less well off market segments. Price Skimming works well with 'early adoptors', such as game consoles. However, you run the risk of no one buying until the price drops.

The second strategy for unique products is called Penetration Pricing. This is when you set the price lower at first, to aim to get as much market share and customer loyalty as possible, before raising the price later. Penetration Pricing works well with products that people will need to buy more than once. However, this could backfire if a competitor lowers their prices to compete with yours, which would make it difficult to raise the price later.

If your product isn't new and has many competitors already, you have the following two options. The first is Price Leadership. This is when a large, established company sets the price for the product, often above the current market rate, and smaller competitors tend to change their prices accordingly. However, this is only suitable for established companies with a strong brand or a designer/luxury brand such as Chanel (This is called Prestige Pricing).

The second option is being a Price Taker. This is when smaller firms follow the prices set by a market leader. They will usually set their price just under them to create a USP and become more competitive. If a smaller company had a unique selling point other than a lower price, they could use their leverage by using price skimming or penetration.