2. 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

3. “NEW PRODUCT PRICING”

4. Price: A price is simply amount of money that
needs to be exchange for some thing.
The Basic Strategy of pricing for New
Product:
• Initial Pricing:
 Price Skimming:
 Penetration Pricing:

5. 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.

6. 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

8. 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.

9. 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 .

11. 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.

12. • 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

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

19. 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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21. 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.

22. 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.

23. 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.
3. Introductory stage
4. Period of Market growth
5. Market Maturity
6. Decline

24. • 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 time
•It sales is low
•Profit is low or negative
•High distribution
•Promotion expenses

25. 2. Period of Market
Growth:period comer to an
•As the introductory
end, the period of market growth starts.
•This period usually brings some profits.
Characteristics:
•High sale
•Early Adopter
•Profit increase
•Unit cost fall
•Improved quality and feature

26. 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 down
•More longer
•Competitors, mark down prices
•Increase advertising
•Sales promotion

27. 4. Decline Stage:
The sale of the product declines and
the product eventually disappears.
Characteristics:
•Sales slow down
•No profit

28. • 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.

29. 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.

30. 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

31. Price
Price
Cost
Cost
First mover Substitute company