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New Concerns about the Pricing of New Products

Manufacturers and retailers must factor in national sensitivities to price volatility.

Title: Pricing in the International Takeoff of New Products

Authors: Deepa Chandrasekaran (Lehigh University), Joep Arts (VU University Amsterdam), Gerard J. Tellis (University of Southern California), and Ruud T. Frambach (VU University Amsterdam)

Publisher: Social Science Research Network

Date Published: September 2012

“Product takeoff” is the period when consumers begin buying and using a new item on a large scale. It’s a critical turning point in a product’s life cycle, potentially heralding mass appeal and lasting success. Not surprisingly, price is a critical factor in determining when, and even if, a new product takes off.

It has been suggested by previous researchers that setting an initially high price that gradually declines (a practice known as price skimming) can help attract consumers and hasten the takeoff stage. Indeed, websites that help consumers either pounce on or delay their purchases of cutting-edge items by comparing sales trends and price levels over time have become something of a cottage industry.

Although several studies have focused on the effects of pricing on takeoff within single national markets, how well pricing strategies travel internationally has gone largely unexamined. In addressing that question, this paper finds that high price volatility—sharp deviations from an expected trend—is a key variable across all markets. Big price swings can significantly lower the likelihood that a product will catch on, no matter where that product is being sold, though not always to the same degree. How volatility affects sales within national markets and what other factors can magnify or mitigate its impact is the central theme of the research.

Though volatility looms larger, the study also examines the effect of another important pricing dimension: relative price, the current cost of a product compared with its introductory price. The introductory price typically becomes a reference point for consumers, who will perceive a “gain” when it goes down.

Volatility, meanwhile, tracks short-term deviations from the expected trend in a product’s price. (In other words, a higher price tag suddenly appears on a product when sales in its category are generally slipping.) Because manufacturers often spend large sums on research and development, they sometimes temporarily jack up prices on new products to recoup their costs. As a result of such price hikes, consumers may postpone their purchase or not buy the product at all—delaying or even killing a takeoff.

Most of the previous research on new product growth has relied on annual data, which is widely available but can mask short-term swings in price. To obtain a closer look at early-stage shifts, the authors focused their study on consumer electronics. Because of that sector’s fast-moving nature, marketing managers often launch new products using monthly, bimonthly, or quarterly data. After Apple introduced the iPad, for instance, the new category of media tablets sold more than 3 million units in a few months. That type of skyrocketing demand must be assessed on a more fine-grained level than annual data provides.

The authors obtained sales and price data for every other month of the period between 1999 and 2005 on the rollouts of seven consumer electronics products: digital video recorders (which send data to hard drives and memory sticks), DVD recorders (which record information on blank CDs and DVDs), home theater surround-sound systems, LCD TVs, plasma TVs, MP3 hard disk players, and MP3 flash players. The launches were tracked in the United States and seven European markets: France, Germany, Italy, the Netherlands, Spain, Sweden, and the United Kingdom.

The bimonthly data provided the authors with a more accurate view of volatility—and its impact on takeoff—than had been available from annual figures. For example, annual data on price fluctuations for the plasma TV category in the U.K. showed an overall decline from the introductory price. But the bimonthly graph revealed a much more complex picture of volatility, with occasional spikes in price throughout a downward trend. A short-term view also allowed the authors to control for such variables as seasonality—times when certain products are marked up or put on sale.

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