In this article we are discussing the issues relating to pricing of new products after all other preliminary steps are completed.
It is because new products pose some special problems in the matter of pricing. New products can be classified into:
1. Intrinsically new products arising out of technological innovations, and
2. New product arising out of marketing-oriented modifications.
It is the first category, of intrinsically new products that demands a special approach in pricing.
Difficulties Firms Face in New product pricing
As there are no precedents for new products, there are no trends to indicate how the market will react to different levels of pricing. Even in the matter of demand, often only some sketchy information is available in respect of new products.
Two broad methods of pricing — demand based and competition based pricing if considered, neither of them suits a new product. Demand-based pricing is out of question for such products, as adequate data is not available in respect of these products. Competition based pricing is also out of question, because the product is a pioneer and competition will only be later phenomenon, when â€˜me-tooâ€™ products enter the scene The next alternative to be considered is cost plus pricing. Here too, there is a difficulty in respect of new products. In several cases, the actual costs of new products are difficult are difficult to measure.
Allocation of over heads to the new product, for example, is done usually on the basis of untested assumption. Similarly, R&D expenses would have been shared by several new product ideas and apportioning it to a particular product may become difficult. Even if the costs of the new product can be accurately measured, cost plus pricing or breakeven pricing cannot be straightway adopted because no information is available regarding the marketability /possible sales volume of the product. In fact, such imponderables have prompted marketing experts to comment that new product pricing has to be done in a vacuum.
Firmâ€™s Requirements in pursuing the New Product
The firmâ€™s requirements in going for new products can be one of the following:
Â· To be a real innovator and to earn the rewards associated with innovation.
Â· To exploit a market need that is coming to the fore.
Â· To expand the product mix to ensure steady growth over the long term.
There are companies which have a thirst for innovation. Usually, they are also very ambitious in the matter of rewards. They are prepared to shoulder the risks associated with product innovations, as they know that without undertaking such risks, they cannot gain big rewards. New product development is second nature to such companies and they constantly at this game.
The second category of companies goes in for a new product, when they have spotted a felt need for it in the market.
In the third category, the compulsion for going in for a new product comes out of the companyâ€™s desire to keep expanding its product mix. The company does not want to limit itself with existing products / product lines. A new product idea that fits in with the basic requirement of product mix expansion will be nurtured by such a company. Such companies are generally more conservative in their approach to new product development relative to the other two categories. Their policy is one of â€˜limited riskâ€™. They will take up only those product ideas that, in their estimate, are sure to fetch commercial success.