As companies develop new products, many people across the organization are involved in the decision-making process. One of the most difficult is how products should be priced. Jerry Bernstein offers his insights into product pricing in today’s blog with nine best practices for reaching the final decision.
1. Use a Process
One of the most challenging tasks a marketing organization will face involves setting the “right” price for a new product. New product pricing is complex, so it’s important to use a process that breaks down the task into manageable elements. An effective process will integrate these elements, while reducing risk and increasing confidence in the important decisions to be made. Some elements to consider are the following:
- Start early to understand value
- Perform customer value research
- Get the right competitive price positioning
- Manage the portfolio
- Understand value segments
- Take a hard look at product costs
- Forecast revenue and profitability
- Don’t ignite a price war
2. Start Early to Understand Value
Understanding value from the perspective of the customer is central to pricing new products. Customer needs should be researched and included early when concept ideas are being created. Knowing customer needs allows you to answer the important questions: What features do customers value, and what are they willing to buy? Avoid the mistake of making a substantial investment in a product that has little chance of success.
3. Perform Customer Value Research
Product design, competitive positioning and pricing all require a systematic approach to understanding customer needs and perceived value. Customer value research encompasses both qualitative and quantitative research methods for understanding customer perceptions. Marketing professionals readily accept the idea that price should be based on product value versus cost. The challenge is to set a product price that accurately reflects the customer’s perception of value. Qualitative research can illuminate questions such as:
- What product features are most valued by the customer?
- What barriers will limit successful entry into the market?
- What is the likely acceptance of various price ranges?
Quantitative research employs statistically valid methods to quantify preference share of the new product in relation to both the competition, as well as the product portfolio. These techniques are used for evaluating the trade-offs customers would make between features, brands and price. Quantitative research will answer questions such as:
- What price-to-unit volume relationships – preference share – can be predicted under a range of market and competitive scenarios?
- To what extent will the new product cannibalize current products?
- What industry segments or world areas will support premium prices?
4. Get the Right Competitive Price Positioning
Competitive positioning recognizes that purchase decisions are not made in a vacuum. Understand all the competitive alternatives to your product. For very new products, the competitive alternative is often not a product, but instead an alternative solution. Use your sales channel if possible to help develop your understanding of the competitive landscape, and also include your sales people in this activity. You’ll be surprised at how much they know and how grateful they are to participate. It is important to have an understanding of the perceived value for competing products and technologies. Their relative value positions should be mapped, along with the best judgment of selling prices. Both qualitative and quantitative research will help to get the right competitive positioning.
5. Manage the Portfolio
Beware of cannibalization. It is not uncommon for a company to release a new product that cannibalizes a product that’s more profitable. Understanding cannibalization will keep you from shooting yourself in the foot.
Take advantage of the product introduction to optimize the positioning of all products in the portfolio. For example, adjusting prices of both the new product and existing products can be used to control a desired adoption rate.
6. Understand Value Segments
Research frequently identifies distinct groups of customers that have differing value perceptions for the product. Value segments may be determined by application of the product (e.g., critical applications vs. non-critical), type of customer (e.g., OEM vs. end user), the industry that is purchasing the product, or the region to which it’s being sold. A solid understanding will help you define custom product-solution packages, as well as price structure and discount management policies. It’s also important to answer this question: How should the product be priced when one segment is willing to pay a higher price versus another?
7. Take a Hard Look at Product Costs
A realistic judgment of product costs recognizes that both variable and fixed costs be considered. Also the cost is likely to change over time. It is typical to have new product costs that are higher than existing products and higher than forecast when development began. Remember that cost is also dependent upon the predicted volume demand of the product. Not only must these facets of cost be understood for the purpose of building believable revenue and profitability forecasts, but a cost analysis can help to drive engineering and procurement functions to the lowest possible cost for the product.
8. Realistically Forecast Revenue and Profitability
All too often, a company’s new product plan greatly overstates revenue and profitability. Forecasts are frequently made in a vacuum, with little attention as to how many units will be sold and where the business will come from. A unit-based forecast with a realistic product price is essential. Review the marketing tools and data used to forecast profitability, and beware of tools that don’t include a full accounting or accurate picture of costs.
9. Don’t Start a Price War
Company stakeholders in the product will often make the judgment that their new product has a higher value relative to the competition. And yet, they frequently set prices at parity or below the competition, with a price positioning that can upset industry equilibrium and ignite a price war. A competitor that can’t compete on value will attempt to defend market share by lowering price. The results can be disastrous for all players in the market.