New products play an integral, albeit frequently misunderstood, role in the product life cycle. Every product life cycle begins with the launch of an innovative new product. When the Apple iPod first hit store shelves in 2002, it transformed the way that consumers purchased, stored, and consumed music. Today, the market for portable music players with electronic storage capacity is in the growth stage of the product life cycle with few signs of reaching maturity any time soon. Whereas all product life cycles begin with the launch of a new product, the converse is not always true — not all new products start a new life cycle. Companies frequently launch new products at the maturity stage to refine their differentiation relative to the many competitors in the market. Even when a new product provides a completely new benefit, it may not be an innovation from the standpoint of buyers. For example, drugs are so readily accepted as cures in our culture that new ones are generally adopted with little hesitation by both doctors and patients. Similarly, most new consumer packaged goods products and business manufacturing products represent incremental improvements to existing products in a mature product category. This distinction between innovative new products early in the life cycle versus incremental improvements to existing products in mature markets is an important one because the focus for pricing strategy changes depending on the stage.

EXHIBIT 7-1 Sales and Profits Over the Product's Life from Inception to Demise


Understanding the unique aspects of pricing new products, regardless of their stage in the life cycle, is crucial for a number of reasons. First, new products represent a primary source of organic volume and profit growth, and avoiding pricing mistakes can have both short and long-term impact on financial performance. If priced too high at launch, a new product will fail to achieve the volume necessary to maintain short-term profitability. Conversely, if priced too low, a new product may achieve its volume targets while failing to deliver sufficient profits. The latter scenario, pricing too low at launch, can have long-term implications for future profit growth because existing products are the primary reference price for future products. As we explained in, customers with a low reference price will frame the purchase as a loss, leading to greater price sensitivity and lower willingness-to-pay.

A second reason that new product pricing is especially important is that it represents an opportunity to redefine the process and considerations that determine what and how customers purchase. Customers are less knowledgeable about new products and, hence, must educate themselves about new features, benefits, and, ultimately, the value that the product might deliver. This lack of knowledge represents an opportunity and a challenge for marketers. The opportunity stems from the fact that customers are more receptive to new value communications, price metrics, policies, and price points. As a result, new product launches represent one of the best opportunities to introduce value-based pricing to a market because customers are prepared for, and even expecting, change. The challenge stems from the fact that customers perceive higher risk, which makes them reluctant to purchase even what promises to be a good value.

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