09 Mar 10 Leading Strategies for Pricing New Products (2021)
Ten new product pricing strategies that work
Introducing new products creates an exciting opportunity to attract new customers and reinforce your presence in the market. At the same time, defining your new product pricing strategy is exciting for a very different reason. With so many options to choose from and with so little historical data to support your choice, how do you make the right decision?
These ten leading pricing strategies for new products can get you started.
(And with the help of retail pricing software, you can find the optimal strategy for your business.)
Why is new product pricing so challenging?
The pricing strategy you choose for a new product has enduring ramifications. This is the only chance you have to create a first impression with your customers. Setting initial pricing high may discourage customers or may create the impression of premium quality.
Low prices, while more accessible, could permanently mark the product as a commodity.
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Pricing determines your long-term profitability. Low prices leave little room for promotions or end-of-lifecycle markdowns. High prices generate higher per-unit margins but may constrain top-line revenue.
The challenge many retailers face with new product pricing is the lack of actionable information. Without the right tools, looking at your historical sales may not give you any insight into the optimal new product pricing strategies.
New product pricing strategies should be tailored to your unique business
Adding to the complexity is how context-sensitive pricing strategies are. No two markets are alike. No two retailers are alike. Pricing strategies that work for one product will be inappropriate for another product. You have to balance many constraints and limitations to choose the right approach, among them:
- Production and distribution costs
- Positioning strategies
- Target customer base
Balancing the tradeoffs and identifying the best pricing strategy or combination of pricing strategies has always required deep retail management expertise.
But in today’s dynamic and data-rich retail environment, leading retailers are leveraging the power of AI to deliver more powerful insights into pricing strategies. These Advanced Analytics tools can account for all of your business constraints, analyze how pricing affects sales performance in your stores, and evaluate many different strategy combinations.
Ten pricing strategies for new products
1. Price skimming
Like layers of cream in a bottle of milk, a product’s addressable market consists of customers with different levels of price sensitivity.
Price skimming lets retailers maximize new product profits by setting initial pricing high and gradually lowering the price over time. The retailer will make more money on less price-sensitive customers early in the product lifecycle before selling to less profitable customers later on.
This strategy will not work for all product classes. Price skimming can work with consumer technologies that have unique features or demand from early adopters. On the other hand, most customers will ignore a high-priced product if they can find comparable products elsewhere.
2. Pricing for market penetration
Alternatively, retailers can take the opposite approach by pricing new products low and then raising the price over time.
Market penetration pricing catches customers’ attention both to the product and to the retailer offering the product. As its name implies, this approach can help a retailer establish itself in a new market or raise customer awareness when the retailer adds new product categories.
Competitors can blunt the strategy’s effectiveness through temporary price reductions and price matching policies.
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3. Product line pricing
Context matters when introducing a new product in an established product category.
Setting the price too low will undermine sales of the other products in the line. Pricing new products too high will leave the new product languishing on the shelf.
Retailers must also consider what role the new product will play within the line. A high-priced premium product raises the value perception of slightly cheaper products and increases their sales. Likewise, a low-priced generic brand can make slightly more expensive products more compelling.
4. Captive product pricing
Captive product pricing sets a low price for a product that requires recurring purchases of profit-generating products or services.
Razors and razor blades are classic examples of captive product pricing. Movie theaters can offer low-priced tickets since they make most of their profits through concession sales. But this pricing strategy is not limited to physical products.
Retailers that offer delivery, maintenance, and other services can use captive product pricing. An initial promotion introduces customers to a service that they continue to use and pay for.
5. Bundle pricing
With bundle pricing, retailers sell complementary items together at a combined price that is lower than the sum of their individual prices. The products may be packaged together in a hard bundle or simply scanned separately at the register in a soft bundle.
This strategy prevents price erosion by separating the discount from the individual products. As a result, bundle pricing can be an effective way to introduce new products while keeping initial pricing high.
An added benefit of bundle pricing strategies is the way they limit competitors’ ability to price match.
6. Optional product pricing
Optional product pricing strategies work best with products that have associated accessories — dolls and their clothes or computers and their cables.
Retailers can set a low price on the base product and balance the low margins with sales of profitable options. But success depends on achieving the attachment rates that reach this balance. Retailers with grab-and-go business models must rely on merchandising to encourage customers to fill their baskets.
With an assisted sales model, store employees can suggest additional purchases to make the transaction more profitable.
7. Pricing at a premium
Premium pricing lets retailers establish themselves at the high-end of the market by setting prices higher than their competitors.
Of course, this strategy cannot work if everyone else sells the same or comparable products since customers will choose the lower-priced option. Designer brands, high-end packaging, in-store experiences, and effective marketing can create the perception of quality needed to make premium pricing strategies work.
8. Economy pricing
At the other end of the scale, economy pricing attracts price-sensitive customers and relies on high sales volumes to compensate for low unit margins. Retailers that adopt economy pricing often make it the core of their overall business strategy.
Thin product margins require a relentless focus on operating costs which impacts store design, marketing, and all other aspects of the business. As a consequence, this strategy is better suited for large retail stores.
However, other retailers can incorporate economy pricing in the form of loss leaders provided they have sales strategies that increase per-transaction profits.
9. Price Allowances
Price allowances give the customer a discount for meeting certain conditions or in exchange for certain actions.
The trade-in allowance, for example, is a standard part of automotive pricing. While promotional allowances such as loyalty discounts or military and senior citizen discounts provide incentives for customers’ recurring business.
Price allowance also occurs between retailers and vendors. A retailer will give the vendor’s products advertising placement, in-store merchandising, or other consideration in exchange for a promotional allowance in the vendor’s pricing.
10. Promotional pricing
Temporary, advertised discounts get customers’ attention which makes promotional pricing useful for introducing new products or when retailers enter a new market. The heightened attention increases in-store or online traffic and generates additional sales.
Over-reliance on promotional pricing strategies can be dangerous. When customers quickly learn they are better off waiting for the discount, your profitable off-promotion sales will suffer.
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How do you employ these new product pricing strategies?
Retailers have many other options for setting new product pricing in addition to, or in combination with, the strategies above. The advantages and disadvantages of each will vary depending on the product and the market as well as the unique constraints and preferences of each retailer. There is no one, right answer. But finding the best answer for your business can be an overwhelming task. Today’s retail business is incredibly dynamic and allows little time for deep analysis. But what do you do without the sales history to accurately forecast new product demand?
Fortunately, the information you need does exist within your existing sales data. The sales histories of similar, adjacent and complementary products can inform the pricing of your new products. But teasing this nuanced information out of sales data is not something you can do with spreadsheets. That is why large-scale retailers invest in price optimization software to determine the optimal price for new products.
Retalon’s Advanced Analytics solution takes a holistic view of the pricing and sales of your existing products. By identifying relevant factors such as product specific purchasing behavior, Advanced Analytics can accurately optimize the price of new products and forecast demand for each store location.
Contact Retalon to find out how an Advanced Analytics solution can provide your business with the optimal pricing strategy for your new products.