Small Business Marketing
How To Price a New Product
Written by James Garvin for Gaebler Ventures
Getting the price of your new product is critical to the potential customer adoption. Like they say, you only get once chance to make a good impression and if you price your product too high you run the risk of scaring away customers, while if you price your product too low, you run the risk of leaving profits on the table.
The ultimate goal of pricing is to try to get each customer to pay their maximum willingness to pay which allows the firm to maximize profits.
This is very difficult to impossible to achieve in real world, however, there are strategies to help firms create different prices for their products that reduce the amount of profit left on the table while attracting a high number of customers.
Using Apple's product launch success, we can study their pricing strategy and how this can be adopted to your new products.
When they launched the iPhone, they originally priced at $599 and $499 for the 8GB and 4GB respectively. Ten weeks later, Apple cut the price of their 8GB iPhone to $399, $200 lower than the original price. Apple was able to get away with pricing its iPhone high during product launch to price discriminate against those consumers who had extremely high value for the iPhone. This is a common pricing strategy for many new consumer technology products where there is a vast difference in the value each consumer places on a new technology product.
With just about every product launch, Apple has successfully developed different versions of their products that enable customers to self-select the model and price that is right for them. Rather than developing one product for all of your target segments, add new features, or take features away and alter your pricing based on those versions that allow you to appeal to the greatest number of customers. The customers who value all of the high tech and fancy features are going to be willing to pay a price premium for the more advanced version. However, there will be many more customers who are not willing to pay a premium for all the bells and whistles, but who will pay a lower price for a product version that has less features.
Product versioning and price discrimination strategies have become a popular way for firms to have their cake and eat it too.
Aside from cost, your additional value-add and competitive pricing will dictate where you should price your new product. The iPhone does have competition from other smart phone providers such as Palm and Blackberry. Apple has always commanded a price premium for their products and the iPhone is no different.
However, why didn't Apple set a price of say a $1,000? The law of relativity prevented Apple from pricing it too high above of the competition. Apple is able to price their products just high enough above the competition that they yield maximum profits while still attracting a high number of customers. They are able to do this successfully because they support their higher priced products with features and aesthetics that provide their target customers with greater value than the competitor phones.
As you consider your pricing strategy, consider ways that you can use price discrimination and product versioning to create a product launch strategy. Consider where your competitor products are priced and the difference in value your products provide to determine the right price.
James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.
Share this article
Additional Resources for Entrepreneurs
We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.