Small companies can use a number of pricing strategies for new products. Some business owners use a cost-plus method for pricing. They calculate production and advertising costs then add a percentage to their unit costs. Other companies have a specific return on investment in mind for new products. Whatever the case, business owners must study the market and competition before setting a price for new products.
A company will usually study the demand for industry products before setting a new product price. Demand may be relatively elastic in the industry, meaning consumers are sensitive to price changes. Therefore, the quantity that consumers demand will decrease as prices increase. Contrarily, demand may be highly inelastic. Inelastic demand means consumers are not overly concerned with price. Companies that produce highly technical devices often experience inelastic demand. For example, a small cell phone company may introduce a new type of cell phone. Certain consumers may desire the phone so much that they are not concerned how much it costs.
A company will often use a price skimming or penetration pricing strategy for new products. Companies that use a price skimming strategy will typically set prices relatively high versus competitive products. Contrariwise, companies that use a penetration pricing strategy will usually price their new products lower than competitive products. A company may also price its product commensurate with competitive products.
A business owner will use a price skimming strategy to quickly recoup product and advertising costs. She may not have access to much business capital. Therefore, she needs the money to produce more products and increase advertising expenditures. The benefit of a penetration pricing strategy is that it can quickly increase market share, according to Net MBA website. The business owner will deliberately price her products low to achieve a high business volume. Subsequently, she will likely focus on producing high-quality products to keep those customers. Meeting competitive prices is just a safe alternative. Consumers are already paying a certain price for existing products.
Most initial pricing strategies are temporary. A company cannot continue to keep prices too low or high. The company will risk losing potential customers with high prices and sacrifice profits with low prices. However, a business owner can continue to offer occasional price reductions for new products. For example, some companies offer rebates on new products, where customers will receive money at a future date.
The best way to know how to price new products is by asking consumers. Companies often use focus groups and marketing research to determine prices for new products. For example, managers of a small restaurant may interview 10 customers on price in a focus group. Their objective may be to determine how much customers would pay for a new breakfast item.