Price Determination Process

Price Determination Process 2018-09-08T09:39:41+02:00

How much should our new product cost? A question that is discussed a number of times right from the birth of the idea to the launch of the finished product. Price determination of new products IS a difficult task and as a consequence our assignments over the years have shown, that companies set the optimal price incorrectly in 9 out of 10 cases and quite substantially so.

This article discusses the Price Determination Process. If your existing products have higher priority, you may find more inspiration in our article on Price Optimisation.

Starting point for price determination of your new product

Basically, there are 3 methods to determine a price: Cost+, competitor based, and value based. There is no reason to go through them all, as the latter one should be the starting point for any new product, if the goal is to differentiate it on the market.

Which value does the product in fact render and/or which value is perceived by the consumers? These are the key questions and the answers to them are often far from similar. We have experienced products, that were in fact more expensive than those of the competition and were considered cheaper, because they were easier to work with. Many other examples show that consumers apply perceived immaterial values to the factual value and thus are willing to pay a premium. Separating the two is important both when it comes to price determination and with communication.

Pricing is part of other essential considerations

Price determination of a new product is not merely a question of price, as there are at least 4 essential areas in need of thorough consideration in connection with pricing:

  • Concept interest
  • Consumers’ feature and product preferences
  • Segmentation
  • Portfolio cannibalisation

Concept interest

Prior to pricing it is relevant to uncover how many consumers have an actual interest in the product. Even though you may have a well-defined market segment, there is bound to be a group that is not truly interested. For instance, if you want to place a dermatological laser on the market your segment would be dermatologists. No matter what your price is, it is far from certain that all dermatologists would be interested. The benefits of the new laser may, in their opinion, not be worth the change, maybe they want to continue with what they are used to or maybe they have recently bought a new laser, that will be written of in another 5 years.

So how big a part of the segment is in reality on the market? In this case, it is relevant to pose the concept interest question (example below) to a section of the target segment. The question will also provide answers to how interested the consumer is, i.e. how many are very or relatively interested and how many are not dismissive but yet more reluctant in their interest.

Example of concept test questions:

Based on the previous presentation, how likely is it, that you will purchase XX if it corresponds to the description and is reasonably priced?

  1. Will definitely buy
  2. Will probably buy
  3. May or may not buy
  4. Will probably not buy
  5. Will definitely not buy

With this clarification of the segment’s true size the next step is understanding the feature- and product preferences that matter the most.

Feature- and product preferences within the segment

What does feature- and product preferences have to do with pricing? And why discuss it now, when the product is close to being developed or maybe close to being launched?

These are relevant questions. And maybe you have produced a product with such a clear and simple profile, that you are able to skip these considerations. Most products that are launched consist of several qualities that may be configured differently, or a single feature may have different levels, i.e. the battery time of a laptop.

That is the reason why it is very relevant indeed to uncover the relative importance of the most significant features and not the least the value and thus willingness to pay, that the consumer applies. Uncovering this information gives transparency to which features it is most important to prioritise in the development phase, and often with a reduced product complexity as a result, and which ones are vital in value propositioning and thus should be in focus in the launching communication. Finally, setting the market price for single features and thus the product price in its entirety becomes more precise. Our experience shows that these conclusions often hold significant surprises. 

Price determination should be founded in segments

It is generally known, that any market has a number of segments. They are characterised by demographic or branch factors and whilst they can be excellent variables in connection to market communication, they are rarely useful in price determination.

Demand and value are the key to price determination and are often seen as having a common denominator across demography and branches. With technical products there are often 3 common segments: (a) price focused, when a basic product will do, as long as the price is low, (b) technically focused, who want the best technical solution, almost at no matter what cost and (c) service focused, whose wants are simply that the product works, is easy to use and that the support is good. The question is rarely if these segments exist but rather how big they are in connection to each other, what the willingness to pay in each segment is, and what effect as a whole it has on pricing.

Portfolio cannibalisation and optimisation

A much overlooked factor of price determination is the possible cannibalisation of existing products. Companies are aware of it, but it is overlooked due to the estimations, that usually are nothing but guesswork, all though large sums are potentially at stake, and worst case the new product’s business case or feature set itself.

Cannibalisation is one thing. The truly interesting question is, how to best compile the portfolio to optimise the company’s over all sale and earnings. When it comes to new versions of existing products the question is, should the previous version but put to rest so as to only focus on the new one, or should they co-exist side by side with different prices. The answer to this question is often poorly substantiated and thus usually based on perception rather than on facts. This is where Contribution comes in.

Concept interest, feature/product preferences, segmentation and portfolio cannibalisation and the price determination based on them are all elements that we bring into one single analysis often with a Conjoint analysis as starting point.

Please contact us, if you would like to know more about how we can ensure the best possible price for your new product and earnings of that product and much more.

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