New-Product Pricing Strategies
Pricing strategies usually change as the product passes through its life cycle. The introductory
stage is especially challenging. Companies bringing out a new product face the challenge of
setting prices for the first time. They can choose between two broad strategies:
market-skimming pricing
market-penetration pricing.
1- Market-skimming pricing strategy (price skimming): Setting a high price for a new
product to skim maximum revenues layer by layer from the segments willing to pay the high
price; the company makes fewer but more profitable sales.
Market skimming makes sense when the product’s quality and image support its higher price,
and enough buyers must want the product at that price. To use skimming, competitors should not
be able to enter the market easily and undercut the high price.
Market-penetration pricing strategy: Setting a low price for a new product to attract a
large number of buyers and a large market share.
Rather than setting a high price to skim off small but profitable market segments, some
companies use market-penetration pricing. They set a low initial price in order to penetrate the
market quickly and deeply—to attract a large number of buyers quickly and win a large market
share.
Several conditions must be met for Market-penetration pricing strategy to work: 1- The
market must be highly price sensitive so that a low price produces more market growth. 2-
Production and distribution costs must fall as sales volume increases.
The low price must help keep out the competition, and the penetration price must maintain its
low-price position—otherwise, the price advantage may be only temporary.
Product line pricing It is the process of setting the price steps between various products in a
product line which based on cost differences between the products, customer evaluations of
different features, and competitors’ prices.
In product line pricing, management must decide on the price steps to set between the various
products in a line. The price steps should take into account:
[Link] differences between the products in the line
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In many industries, sellers use well-established price points for the products in their line. The
seller’s task is to establish perceived quality differences that support the price differences.
Optional product pricing: The pricing of optional or accessory products along with a main
product.
Many companies use optional-product pricing—offering to sell optional or accessory products
along with their main product.
Pricing these options is a sticky problem. The company has to decide which items to include in
the base price and which to offer as options.
Captive product pricing: Setting a price for products that must be used along with a main
product, such as blades for a razor and games for a videogame console.
Producers of the main products often price them low and set high markups on the supplies.
In the case of services, this strategy is called two-part pricing. The price of the service is broken
into a fixed fee plus a variable use rate.
By-Product Pricing: Producing products and services often generates byproducts. If the by-
products have no value and if getting rid of them is costly, this will affect pricing of the main
product. Using by-product pricing, the company
Product bundle pricing: Combining several products and offering the bundle at a reduced price.
Using product bundle pricing, sellers often combine several of their products and offer the
bundle at a reduced price. Price bundling can promote the sales of products consumers might not
otherwise buy, but the combined price must be low enough to get them to buy the bundle.
Most producers don’t sell their goods directly to the final users; between them stands a set of
intermediaries performing a variety of functions. These intermediaries constitute marketing
channels (also called trade channels or distribution channels), sets of interdependent
organizations involved in the process of making a product or service available for use or
consumption.
They’re the set of pathways a product or service follows after production, culminating in
purchase and use by the final end user.
The Importance of Channels
A marketing channel system is the particular set of marketing channels employed by a firm.
Decisions about the marketing channel system are among the most critical facing management.
In the United States, channel members collectively earn margins that account for 30% to 50% of
the ultimate selling price, whereas advertising typically accounts for less than 7% of the final
price.
Marketing channels also represent a substantial opportunity cost because they don’t just serve
markets, they must also make markets. The channels chosen affect all other marketing decisions.
The company’s pricing depends on whether it uses mass merchandisers or high-quality
boutiques.
The firm’s sales force and advertising decisions depend on how much training and motivation
dealers need. In addition, channel decisions involve relatively long-term commitments to other
firms. When an automaker signs up independent dealers to sell its automobiles, it can’t buy them
out the next day and replace them with company owned outlets. Holistic marketers ensure that
marketing decisions in all these different areas are made to collectively maximize value. Today’s
successful companies are also multiplying the number of “go-to-market” or hybrid channels in
any one area. For example, Hewlett-Packard uses its sales force to sell to large accounts,
outbound telemarketing to sell to medium-sized accounts, direct mail with an inbound number
for small accounts, retailers for still smaller accounts and consumers, and the Internet to sell
specialty items.
Consumers may choose their preferred channels based on price, product assortment, and
convenience, as well as their economic, social, or experiential shopping goals.
The firm must decide how much effort to devote to push versus pull marketing. A push strategy
uses the manufacturer’s sales force and trade promotion to induce intermediaries to carry,
promote, and sell the product to end users.
This is appropriate where there is low brand loyalty in a category, brand choice is made in the
store, the product is an impulse item, and product benefits are well understood. In a pull strategy,
the manufacturer uses advertising and promotion to persuade consumers to ask intermediaries for
the product, thus inducing the intermediaries to order it. This is appropriate when there is high
brand loyalty and high involvement in the category, people perceive differences between brands,
and people choose the brand before they shop. Top marketing firms such as Nike and Intel
skillfully employ both push and pull strategies.
The producer and the final customer are part of every channel. We’ll use the number of
intermediary levels to designate the length of a channel.
Consumer-goods marketing channels of different lengths, industrial marketing channels. A zero-
level channel (also called a direct-marketing channel) consists of a producer selling directly to
final customers through door-to-door sales, Internet selling, mail order, telemarketing, home
parties, TV selling, manufacturer-owned stores, and other methods. A one-level channel contains
one intermediary, such as a retailer.
A two-level channel contains two intermediaries; a three-level channel contains three
intermediaries. From the producer’s perspective, obtaining information about end users and
exercising control becomes more difficult as the number of channel levels increases. Channels
normally describe a forward movement of products, but there are also reverse-flow channels,
important for bringing products back for reuse (such as refillable bottles); refurbishing items for
resale; recycling products; and disposing of products and packaging.
.Several intermediaries play a role in these channels, including manufacturers’ redemption
centers, community groups, traditional intermediaries such as trash-collection specialists,
recycling centers, trash-recycling brokers, and central processing warehousing.
Number of Intermediaries In deciding how many intermediaries to use, companies can use one of
three strategies: exclusive, selective, or intensive distribution. Exclusive distribution means
severely limiting the number of intermediaries.
Firms such as automakers use this approach to maintain control over the service level and service
outputs offered by the resellers. Often it involves exclusive dealing arrangements, in which
resellers agree not to carry competing brands. Selective distribution relies on more than a few but
less than all of the intermediaries willing to carry a particular product.
The company doesn’t have to worry about too many outlets; it can gain adequate market
coverage with more control and less cost than intensive distribution. In intensive distribution, the
manufacturer places the goods or services in as many outlets as possible. This strategy is
generally used for items such as snack foods, newspapers, and gum, products the consumer seeks
to buy frequently or in a variety of locations.
E-COMMERCE MARKETING PRACTICES
E-business describes the use of electronic means and platforms to conduct a company’s business.
E-commerce means that the company or site transacts or facilitates the online selling of products
and services. E-commerce has given rise to e-purchasing and e-marketing. E-purchasing means
companies decide to buy goods, services, and information from various online suppliers. E-
marketing describes company efforts to inform buyers, communicate, promote, and sell its
offerings online.
We can distinguish between pure-click companies, those that have launched a Web site without
any previous existence as a firm, and brick-and-click companies, existing companies that have
added an online site for information and/or e-commerce. M-commerce (m for mobile) is another
emerging trend in e-commerce. Pure-Click Companies There are several kinds of pure-click
companies: search engines, Internet service providers (ISPs), commerce sites, transaction sites,
content sites, and enabler sites. Commerce sites sell all types of products and services, notably
books, music, toys, insurance, travel services, clothes, and so on. “Breakthrough Marketing:
Amazon” describes that quintessential commerce site.
Although the popular press has given the most attention to business-to-consumer (B2C) Web
sites, even more activity is being conducted on business-to-business (B2B) sites, which make
markets more efficient. In the past, buyers had to exert a lot of effort to gather information on
worldwide suppliers. With the Internet, buyers have easy access to information from
(1) supplier Web sites;
(2) infomediaries, third parties that add value by aggregating information about alternatives;
(3) Market makers, third and
(4) Customer communities, sites where buyers can swap stories about suppliers’ offerings.
The net impact of these mechanisms is to make prices more transparent.28 In the case of
undifferentiated products, price pressure will increase. For highly differentiated products, buyers
will gain a better picture of the items’ true value. Suppliers of superior products will be able to
offset price transparency with value transparency; suppliers of undifferentiated products will
have to drive down their costs to compete.
Brick-and-Click Companies Many brick-and-mortar companies debated adding an e-commerce
channel, fearing that channel conflict would arise from competing with their offline retailers,
agents, or company-owned stores.29 Most eventually added the Internet as a distribution channel
after seeing how much business their online competitors were generating. The question is how to
sell both through intermediaries and online. There are at least three strategies for trying to gain
acceptance from intermediaries:
(1) offer different brands or products on the Internet;
(2) offer offline partners higher commissions to cushion the negative impact on sales; and
(3) take orders on the Web site but have retailers deliver and collect payment.
Harley-Davidson asks customers who want to order accessories online to select a participating
dealer. The dealer, in turn, fulfills the order, adhering to Harley’s standards for prompt shipping.
M-Commerce Consumers and businesspeople no longer need to be near a computer to go online.
All they need is a cellular phone or personal digital assistant to wirelessly connect to the Internet
so they can check the weather, sports scores, and more; send and receive e-mail messages; and
place online orders. Many see a big future in what is now called m-commerce (m for mobile). M-
commerce success will be driven, in part, by convenience, ease of use, trust, and widespread
availability.
For example, in Japan, millions of teenagers carry DoCoMo phones from NTT (Nippon
Telephone and Telegraph). In addition to voice and text communication, they can use their
phones to order goods or make purchases at participating outlets like McDonald’s. Subscribers
receive a monthly bill from NTT listing the subscriber fee, usage fee, and cost of all other
transactions—and they can pay the bill at any 7-Eleven convenience store.33
Product Life Cycle Stages
As consumers, we buy millions of products every year. And just like us, these products have
a life cycle. Older, long-established products eventually become less popular, while in
contrast, the demand for new, more modern goods usually increases quite rapidly after they
are launched.
Because most companies understand the different product life cycle stages, and that the
products they sell all have a limited lifespan, the majority of them will invest heavily in new
product development in order to make sure that their businesses continue to grow.
Product Life Cycle Stages Explained
The product life cycle has 4 very clearly defined stages, each with its own characteristics
that mean different things for business that are trying to manage the life cycle of their
particular products.
Introduction Stage – This stage of the cycle could be the most expensive for a company
launching a new product. The size of the market for the product is small, which means sales
are low, although they will be increasing. On the other hand, the cost of things like research
and development, consumer testing, and the marketing needed to launch the product can
be very high, especially if it’s a competitive sector.
Growth Stage – The growth stage is typically characterized by a strong growth in sales and
profits, and because the company can start to benefit from economies of scale in
production, the profit margins, as well as the overall amount of profit, will increase. This
makes it possible for businesses to invest more money in the promotional activity to
maximize the potential of this growth stage.
Maturity Stage – During the maturity stage, the product is established and the aim for the
manufacturer is now to maintain the market share they have built up. This is probably the
most competitive time for most products and businesses need to invest wisely in any
marketing they undertake. They also need to consider any product modifications or
improvements to the production process which might give them a competitive advantage.
Decline Stage – Eventually, the market for a product will start to shrink, and this is what’s
known as the decline stage. This shrinkage could be due to the market becoming saturated
(i.e. all the customers who will buy the product have already purchased it), or because the
consumers are switching to a different type of product. While this decline may be inevitable,
it may still be possible for companies to make some profit by switching to less-expensive
production methods and cheaper markets.
Product Life Cycle Examples
It’s possible to provide examples of various products to illustrate the different stages of the
product life cycle more clearly. Here is the example of watching recorded television and the
various stages of each method:
1. Introduction – 3D TVs
2. Growth – Blueray discs/DVR
3. Maturity – DVD
4. Decline – Video cassette
The idea of the product life cycle has been around for some time, and it is an important
principle manufacturers need to understand in order to make a profit and stay in business.
However, the key to successful manufacturing is not just understanding this life cycle, but
also proactively managing products throughout their lifetime, applying the appropriate
resources and sales and marketing strategies, depending on what stage products are at in
the cycle.
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