Challenges in setting prices the first time
When a company introduces a new product, it is faced with the challenge of setting a price. The main areas of concern is whether the price the price is affordable, whether it meets the costs incurred to produce it, the market share that the price will help the product gain etc
The challenges in setting initial prices are:-
(i) Cost coverage
Whether the price will cover all the direct and indirect unit costs is always an issue.
(ii) Clientele targeted
Whether the price is affordable for the clientele targeted is always a question to the marketers.
Pricing strategies for New Products are two i.e. Market penetration and Market Skimming
Market penetration pricing
This involves setting a low initial price to enter the market quickly and deeply, attract a large number of buyers and win a large market share. Benefits are
• It will discourage new entrants to the market
• Shorten the introductory stage of the product’s life cycle
• Production costs will fall as sales volume increases allowing for further price reductions if needed.
Market Skimming Pricing
This refers to setting initially high prices and spending heavily on advertising and promotion to obtain sales. As the product moves ages the price will be lowered. The aim is to gain high unit profits early in the product’s life cycle. Skimming is a profit maximization strategy.