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(originally published by Booz & Company)


New Concerns about the Pricing of New Products

Armed with a better understanding of the dynamics behind annual numbers, the researchers used bimonthly data for all the products and markets in the study to reveal a series of declining prices that ultimately led to takeoff in the consumer electronics sector. After one year of commercialization—when a product’s growing sales typically begin making their mark, by reaching a measurable level of market penetration—prices fell 5 percent, on average, from what they were at the launch date. Two years out, prices dropped 27 percent from the launch price, and in three to four years they were at 50 percent of the introductory cost. On average, prices at takeoff were about 52 percent of the initial price tag.

Whether a product reaches the takeoff stage can depend on more than volatility alone, the authors’ work suggests. When pricing decisions are made, it’s also essential to consider such other factors as the level of a country’s wealth, word-of-mouth and advertising campaigns, the relative price, and consumer uncertainty about new products. Marketers also need to be aware of the level of social “contagion” (the overlap with neighboring or culturally similar nations) in a given market.

Several of these factors underscore the imperative for managers to understand each foreign market they are attempting to enter. For example, in countries where consumers are more likely to avoid buying products they are uncertain about (such as Spain and France), the effects of price volatility are magnified, whereas in wealthy countries with a greater appetite for new products (such as the U.S.), consumers are less deterred by pricing swings.

Thus, making sure that the price reductions are steady (and volatility is minimized) is most important in less-wealthy countries and in markets where consumers are less likely to be early adopters. And even when external factors, such as shifts in manufacturing costs or pressure from competitors, threaten to trigger volatility, managers should avoid sudden price hikes or drops. If they don’t, they will fail to get an accurate feel for the product’s market value—and that may threaten to derail or delay a product’s takeoff.

The research also highlights the need for manufacturers to set a reasonable opening price and for retailers to adopt a schedule, subject to adjustments mandated by short-term sales data, that lowers the price in a trajectory that is tailored toward takeoff.

Finally, the authors write, managers need to be aware of precisely when takeoff is happening—especially in an era when products can become ubiquitous or forgotten in a matter of months. Thus, they urge companies to favor more granular data, particularly bimonthly numbers, over annual prognostications. Pinpointing takeoff within a period of months, they say, gives firms greater control and flexibility in managing new products.

Bottom Line:
Shifts in pricing—especially volatility (sudden hikes or discounts that run contrary to an expected trend)—play a critical role in determining whether a new product will take off in the international marketplace. Managers must be aware of particular sensitivities to pricing in different countries, and adjust their strategies accordingly.

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