Topic: Price Determination of a New Product.

Group Members:

M. Jaffar Tayar 48

Mirza Ali Raza. 90

Syed Ali Kamran Abidi. 50

Syed Hussain Zain ul Abideen. 85

“NEW PRODUCT PRICING”

• Initial Pricing:

Price Skimming: Penetration Pricing:

The Basic Strategy of pricing for New Product:

Price: A price is simply amount of money that needs to be exchange for some thing.

Initial Pricing For New Product:

• The appropriate initial price has been argued to be either the “skimming” price or the “penetration” price. As the name suggest, Skimming price is said to be to skims the cream of the top of the market by initially setting a relatively high price. The Penetration price is said to be as relatively low level, with intend of achieving broad penetration of market initially. Now we will discuss the each strategy in detail so that we can get much know and how about this topic.

Price Skimming:

Price Skimming is the choice of a relatively high price for a new product when it is first introduced, with the intend of getting as much profit from the product as possible

Three Different situation where long term profit can be prescribed:

• If there are substantial barriers to entry of new competitor with a similar product.

• If the firm expects a positive relationship between its chosen price and the quality of the product as perceived by buyers and potential buyers, it may be profit maximizing in the long term to set a relatively high price initially.

• If the demand for the product is not expected to last beyond the short run.

Penetration Pricing Strategy:

Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price .

The advantages of penetration pricing to the firm are:

• It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competition by surprise, not giving them time to react.

• It can create goodwill among the all-important early adopter segment. This can create valuable word of mouth.

• It creates cost control and cost reduction pressures from the start, leading to greater efficiency.

• It discourages the entry of competitors. Low prices act as a barrier to entry.

• It can be based on marginal cost pricings, which is economically efficient

Disadvantages:

• The main disadvantage with penetration pricing is that it establishes long term price expectations for the product, and image preconceptions for the brand and company. This makes it difficult to eventually raise prices.

• Another potential disadvantage is the low profit margins may not be sustainable long enough for the strategy to be effective.

Price Penetration is most appropriate when:

• Product demand is highly price elastic. • The product is suitable for a mass market

(i.e. sufficient demand). • The product will face stiff competition soon

after introduction.• In industries where standardization is

important. The product that achieves high market penetration often becomes the industry standard (eg.: Microsoft Windows) and other products, even superior products, become marginalized. Standards carry heavy momentum.

Adjusting Price over Time:

• Initial prices of the innovating firm.

• Anticipated changes in market demand, costs, and the number of rival firms will also lead to price adjustments by the innovating firm.

• The dynamic price path.

Maturity of the market:

The market for the new product will be immature initially, the firms will be competing vigorously for market share.

In mature oligopolies we expect to see more price and market share stability, whereas in new markets we expect price and market share instability.

The impact of learning effect on the prices:

• Downward shift of firm’s cost curves:

• As learning continues the cost curves continue to shift downward. We noted that the major impact of the learning effect is felt early in the product’s life, since cost reductions of a given percentage are expected every time the cumulative output doubles.

The impact of plant size on prices:

Many innovating firms start with a small plant size, because they are uncertain about the demand for the product and risk of bankruptcy. Alternatively, they may not be able to afford a larger plant initially, or they may not be able to raise a loan.But when demand is demonstrated expansion of firm will result in greater profit.

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The impact of entry of new firms on prices:

Earlier the entry of the new firm had no impact on product’s price and it merely forced the innovating firm to share the market quantity demanded. Our purpose was to abstract from price changes and show that the firm’s profit per period would be reduced by entry even if prices stayed the same. Now we know that if the firms set prices independently rather than follow a price leader, prices will fall following the new firms.

The growth & eventual decline of the market demand for a new product is known as product life cycle.

•Market demand for new product will shift outward as the product becomes more widely known and appreciated.

•Market demand might be expected to shift inward when the tastes of consumer serve in favor of another new product that may become available and serve their needs.

Most products have life cycles in which they born, grow up, enjoy their peak years, and eventually wane.

Four periods in the life cycle of new product are generally recognized.

1. Introductory stage

2. Period of Market growth

3. Market Maturity

4. Decline

1. Introductory Stage:•The introductory stage invariably costs the

company.

•Not only the product development costs involved, but the company must go to considerable expense to convince the public to give the newcomer a try

•The length of the introductory stage will vary, usually depending upon how easily the product can be tied to success and reputation.

Characteristics: •It takes timeIt takes time•It sales is lowIt sales is low•Profit is low or negativeProfit is low or negative•High distributionHigh distribution•Promotion expensesPromotion expenses

2. Period of Market Growth:•As the introductory period comer to an end, the period of market growth starts.

•This period usually brings some profits.

Characteristics:

•High saleHigh sale•Early Adopter Early Adopter •Profit increaseProfit increase•Unit cost fallUnit cost fall•Improved quality and featureImproved quality and feature

3. Market Maturity Stage:•If the product is strong enough it will get respectable portion of market share.

•Product reaches to maturity in sales.

Characteristics:

•Sales growth slow downSales growth slow down•More longerMore longer•Competitors, mark down pricesCompetitors, mark down prices•Increase advertisingIncrease advertising•Sales promotion Sales promotion

4. Decline Stage:

The sale of the product declines and the product eventually disappears.

Characteristics:

•Sales slow downSales slow down•No profitNo profit

• The product life cycle hypothesis says that the market demand curve will Shift outward an increasing rate at first, then continue to shift outward at a decreasing rate, and finally begin to shift back.

Increase quantity demanded or a reduce quantity demanded depends on the relative growth rates of market demand and the number of firms.

Thus prices are likely to fall as time passes due to following reasons.

•Learning curve effect

•Economies of scale

•Entry of new firms at a rate greater than the rate of increase in market demand.

The price of new products might increase over time if:

•Cost reduction were small or absent

•Market demand increased at a rate faster than the rate of growth of the number of firms.

The benefits accruing to the firm that first introduces a new product that turns out to be successful.

1. Monopoly profits

2. Unit cost advantage or Rapid cost reduction

First mover Substitute company

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