Extent of newness of the product

The extent of newness ad the nature of the new product is the second major feature that will influence the pricing strategy. We can think of several types of new products.

The nature of the product combined with the firm’s requirement in going for the product should guide the pricing strategy. For example, when a company in the category of innovators and leaders brings out a new luxury product, intended for the affluent consumer, serving a created desire, it can fix the price quite high. The company knows that its product is not very sensitive. This leads us to the two broad strategy alternatives available in new product pricing. They are:

1. Skimming pricing
2. Penetration pricing

Skimming Pricing

In skimming pricing, the new product is priced high and the cream of the market is skimmed by concentrating on those segments that are not price sensitive. Such high prices will fetch the firm substantial initial incomes, which it can plough in for further market development and promotion. Though this method, the firm also recovers a substantial portion of its development cost. Later on, the firm may bring down the prices, when it enters mass markets, which are more price– sensitive. Skimming pricing, however, cannot be employed if the product cannot command the patronage of an affluent, non–price sensitive market segment.

The skimming strategy can prove ideal for really new and distinctive products on account of the following factors:

The quantity of the product that can be sold is less affected by price in the early stages, especially when the product has some novelty.

In skimming, the product is tapping only those segments, which in any case, do not bother much about price. And, such tapping will not be possible at a later stage in the life cycle.

Penetration Pricing

The skimming strategy cannot suit all new product contexts. When the new product is likely to be highly price sensitive and when there is no elite market for it, penetration pricing will be the option. As the very name implies, the intention this strategy is to penetrate a broad market through low prices. The income is generated by sales spread over large markets; the large volume facilitates substantial economies in unit cost of production and marketing; and the cycle can continue. The strategy helps to establish the product in the market.

The quantity of product that can be sold is highly sensitive to price, even in the early stages of introduction.

There is no elite market for the products; there is no such segment which is willing to pay any price to posses the product.

The product is likely to encounter heavy competition immediately after introduction. Large volume of sales is required even in the initial stages to ensure economy in production and distribution.