The price of innovation

How to determine the price of a new product? The simplest solution is to compare with the prices of competitors. And if the product has no analogues? Then you can start from the cost price and the accepted rate of profit. But this will not allow you to maximize profits in exchange for the value of the created product. For a more consistent approach, read Dmitry Pokhlebkin's article published on the E-xecutive website.

In the conditions of developed market relations, the price of a product or service is formed on the basis of the ratio of supply and demand curves. Other factors can make a separate "coloring", even if sometimes not too significant; the main thing is that the approach to pricing is intuitive. In the vast majority of developed businesses, pricing is more a matter of monitoring, positioning, and sometimes dumping. In such cases, there is no need to put the issue of pricing at the forefront, since the market itself is able to adjust prices. And this is true for both existing market players and new ones. Both of them easily cope with this task, both in existing markets and in new ones.

The approach to pricing innovative products looks somewhat more complicated. Innovative products may include:

• Fundamentally new substances and materials;
• New or improved designs and technologies;
• Previously unused effective business models.

As you can see, the range of innovations is very wide, starting, for example, from the creation of a new vaccine to the development of a new cinema format. In each of these examples, the marketing plan of the project will rest on determining the price of the final product or service. Further, as a rule, there is a contradiction between the potential capacity of the market and the premium premium for novelty or exclusive possession of technology. Innovative products are not always essential goods, and, as a result, have a significant elasticity of demand in relation to price. As a result, a vicious circle arises: the market capacity of a new product is inversely proportional, and the profit is directly proportional to the increase in price.

In addition, the pricing of innovations should be considered not in statics, but within the periods related to their life cycle; since at different stages of the product life cycle, different segments of consumers behave differently.

In practice, the following three approaches to pricing are used:

• Comparative analysis of competitors' prices (Competitive analysis);
• Cost-based pricing;
• Pricing based on purchasing power (Price-based costing).

Depending on the business sphere and the current market conditions, these approaches may be quite sufficient to calculate the price of a typical product and then assess the profitability of an investment project associated with this product.

The project of creating an innovative product requires a slightly different approach to pricing, the essence of which can be described in the form of the following algorithm:

The essence of the first two stages of the analysis is reduced to attempts to conduct a comparative analysis of prices based on competitors' products and/or substitute products. It is often possible to find any analogues capable of meeting the same consumer needs as the analyzed new product. Further actions are reduced to attributing some utility of competitors' products or substitute products to their cost, and the resulting multiplier can be used to determine the price of a new product. This approach is most acceptable in the case of creating cheaper (reducing the cost of production of the product compared to analogues), more durable or more productive technologies. A slightly simpler approach may be to determine the price in the range from the cost price to the average price of competitors.

If such an analysis does not allow us to obtain relevant data, which is most likely due to the fundamental novelty of the product, then the main task is to determine the strategy for entering the market. At the same time, each of the possible exit strategy options will be determined not even by the company's overall strategy for the rest of the product portfolio and sales markets, but rather by the conditions under which this new product was obtained.

The choice of a "Profit Maximization" pricing strategy will be logical if the new product can be protected by patents and know-how. In this case, the company gets a kind of monopoly on the production of a new product. The goal of maximizing profit through optimal pricing can be achieved by analyzing the elasticity of demand. The elasticity curve will show to what value the price can be increased so that an increase in margin profit by 1% would lead to a decrease in market capacity by a similar amount (1%). A further increase in the price will be characterized by a relatively greater loss of revenue and, as a result, a smaller total profit.

The variant of the "Revenue maximization" pricing strategy is quite justified if the barriers to entry (for example, technologies, competencies, capital, economies of scale) into the field of production of a new product are quite low. In this case, it is important for the company to occupy and maintain the position of a leader in the market of a new product. In the future, this will allow to capitalize on the achieved market results, for example, to become the center of consolidation of the industry or vice versa – to go out of business at the time of the largest capitalization of the company.

Another variant of the pricing strategy is the "Social Mission", which is quite suitable for state-owned companies implementing state projects (for example, vaccine creation programs or the development of energy-saving technologies), or for private companies that receive various kinds of preferences from the state in exchange for "humane" pricing focused on the maximum number of consumer segments.

The above approach is applicable to ideal conditions when individual environmental factors of the process of creating a new product are not taken into account. Such key factors include the following:

1. Premium surcharge to the price for:

• The brand of the company (for example, when the product has not only new properties, but also the brand of the manufacturer as an additional value, that is, it is no longer just an exchange commodity);
• Positioning (for example, an expensive advertising campaign, working with an assortment and promotion channels);
• Special in-demand properties of the product (for example, products without preservatives, but with a shorter shelf life).

2. Depreciation of R&D costs (when the depreciation period is set and the quantity of the manufactured product is estimated, which makes it possible to calculate a surcharge per unit of a new product), except when:

• R&D was not required, or the discovery happened by accident;
• The R&D was carried out and paid for under another program;
• R&D would be carried out regardless of the results obtained (sunk costs).

3. Artificial price regulation:

• Government regulation (for example, the intervention of the antimonopoly service in order to reduce the price);
• Premium during the start of sales (for example, focus on the consumer segment "innovators" who respond well to the "skimming" strategy);
• Forecasting a short life cycle (for example, when a new product will be quickly replaced by an even newer one in the near future, which requires an increase in price in order to preserve the payback of the investment project).

4. Technology features:

• The high cost of production, which is not so noticeable at the initial stages of sales, but which can have a significant impact on the company's profit when new players appear on the market;
• Cheaper technologies (for example, due to economies of scale, reduction of scrap, simplification of production technology);
• Cannibalism of the product itself or related industries, when a new product satisfies the same consumer needs as existing substitute products, but at the same time has either a longer service life or greater efficiency (for example: energy-saving lamps that have an increased service life than reduce their own market and at the same time reduce the revenue of energy marketing companies).

5. Segmentation requirements:

• Geography of sales (for example, forced margin due to the transport component);
• Demographics of the presence markets (for example, low consumer solvency, requiring price reduction in order to maximize revenue and profit);
• The choice of b2b and /or b2c, when the cost of a new product is so high due to the complexity of the technology that the benefit from the acquisition becomes obvious only when considering subsequent operating costs, and, as a result, the rejection of one of the segments (for example, the high cost of fluorescent lamps with an increased operational resource when used in street lamps is offset by a decrease budget for the maintenance of services for their replacement).

Each of these factors will have a different impact on the approach to pricing. The task of a marketer is to obtain the most reliable quantitative information about the degree of influence of each of them on the price of a new product. Moreover, the balance of the quality of analytical work and the time of its implementation is already becoming the most important here. Pricing, despite the complexity of the task, should not be the "bottleneck" of bringing a new product to market.

Portal "Eternal youth" http://vechnayamolodost.ru25.08.2010