Many companies make the mistake of charging far less than they could when introducing new products or services to the market. Not only does this practice leave money on the table, it can seriously undercut the value proposition for new innovations -- a miscalculation that, once publicized, can be irreversible.

Yes, consumers are always grateful to receive more value for less money. And yes, higher price structures can make it more difficult to quickly capture market share or realize rapid payback on product-development investments.

But it’s also true that a single bad pricing decision can destroy pricing power through the lifecycle of the product -- and even beyond. Even the smallest of pricing adjustments can make all the difference in profitability.

So how does a company go about pricing to sell? First, avoid the temptation to use existing products as a starting point. This is the most common cause of undervaluing what might be a revolutionary product idea.

Certainly, an analysis of costs and process improvements -- the cost-plus approach -- is needed in order to fully understand the factors that affect margins. So is an examination of the competitive environment. But companies should not assume that price should always be based on cost, nor should they set prices based on their own market history or experience. Maximizing profits means taking a much broader view of pricing.

A scientific approach to demand-driven pricing

Pricing at what the market will bear is the mantra of many companies, and they’re right… up to a point. Successful organizations strive to match prices to the maximum amunt their customers are willing to pay. However, this demand-driven approach requires actually measuring what the market will bear -- not just making assumptions.

The science of demand-driven pricing has introduced new methodologies for testing price elasticity in a controlled way, exploring the full range of pricing options to determine the optimal price for each product. Such sophisticated mathematical and statistical analyses can create a significant competitive advantage, both by maximizing profits and by providing a tool to predict how the competition is likely to react. 

Value is in the eye of the beholder

Understanding the real value of a new offering from the perspective of the customer is another factor on which companies should focus. The more original or revolutionary a new product or service, the greater its potential value. Pricing too low can undermine that perceived value.

Companies must, however, be brutally honest in their assessment of a new product’s true value proposition. What some organizations consider revolutionary may simply be a new-and-improved version of an existing offering. And while some improvements may warrant higher prices, this will not justify the pricing strategy that a revolutionary product can support. 

Again, research is the key to measuring the authentic value and benefits to the customer. Such research should not only delve into product comparisons, but it should also examine the broader implications for the economics of the customer. Does the new product have the potential to save the customer time, money, or other resources in unexpected ways? Once the customer knows about this new service, what are the opportunity-cost implications of forgoing it?

The rewards of getting it right

Diligent market research combined with thorough internal analyses can give companies the pricing confidence they need for successful product introductions. Not only does pricing it right from the get-go affect short-term profitability, it sets the stage for future price adjustments in response to market changes.