How To Price a New Product

How do you price a new product? Most people do it wrong.

How much should you charge for a new product? Charge too much and it won't sell — a problem that can be fixed relatively easily by reducing the price. Charging too little is far more dangerous: a company not only forgoes significant revenues and profits but also fixes the product's market value position at a low level. And as companies have found time and again, once prices hit the market it is difficult, even impossible, to raise them. In our experience, 80 to 90 percent of all poorly chosen prices are too low.

Companies consistently undercharge for products despite spending millions or even billions of dollars to develop or acquire them. It is true that businesses and private consumers alike are demanding more for less; the prices of personal computers, for example, have been pushed downward despite their higher processor speeds and additional memory. Global competition, increased pricing transparency, and lower barriers to entry in many of the most attractive industries have contributed to the trend. But these are not the only problems. Many companies want to make a quick grab for market share or return on investment, and with high prices both objectives can be harder to achieve.

It is difficult to know the "market price" when you are making a new market. Charge too little and you leave profit on the table. Charge too much and you may not have the cash flow to sustain yourself. This is why I am a big fan of "soft openings." I like a chance to feel things out with a small group of customers rather than explode with business from day one and not be ready to handle it. You only get one chance to make a first impression.

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