CEOs' perspective on new product or service pricing.

The Consumer Electronic Show (CES) is an annual Las Vegas event that takes place in early January. In only four days, some 115,000 visitors and about 4,300 exhibitors attend the convention. There, the exhibitors display their newest and often innovative and disruptive products.?

I typically visit CES every year. It is a zoo, and I love it. I walk up and down the aisles and love to see new trends, many new products or services that add value, but also some harebrained new products. I love to talk to innovators and entrepreneurs, many whose mission is to change the world and in addition to their personal fortune.??

Last year, in December and thus before the show, I interviewed about two dozen CEOs of companies exhibiting at CES on their pricing strategy for their new products. I was interested in understanding how these business leaders saw pricing in relation to their new product and if launching at CES influenced how they priced their new product.

I further wanted to understand how these innovators see pricing in the context of a successful product or service introduction—considering, in particular, that pricing itself of a new product or service can often make or break the new product or service. Set the price too low, and the price itself sets an exception in the buyer's mind of a vendor that overpromises and will underdeliver. This is called Expectation Bias and is especially pronounced when the vendor is new and the product is unproven in the market. As a result of a too-low price, sales volume will be low, and the product or service will not meet its potential. Set the price too high, and potential buyers cannot afford the product or service, also leading to low sales volume. Set the price the same as the competition, and the new innovative product or service will be seen as a commodity despite its differentiators and unique value. Consequently, many potential buyers will ignore the new product or service, leading to a low sales volume.?

So, new product pricing matters.?

What did I find from these two dozen interviews? Well, here are the main takeaways:

1. Every CEO I spoke with said that they saw pricing as a crucial component for successfully launching a new product. They all realized that too low prices send a message to the buyer of inferior quality.?
2. Also, every CEO used some combination of competitive pricing and guesses to set their price. Nobody understood that there are better ways to set prices. All these companies said they decided to price their product within the range of already existing alternatives. This is correct, as every purchase is made in context. But, most decided to price towards the very low range of said alternatives, despite being aware that a low price sets an expectation in the buyer's mind of inferior benefits. Further, these new products often added value over and above what the incumbents did, and by setting a low price, they definitely shot themselves in the foot.
3. Similarly, most of the CEOs I interviewed realized that innovative products appeal only, or mostly, to early adopters and that they are just very few. But, at the same time, the interviewees realized that early adopters are not price-sensitive and buy for various reasons, but not because the price is low. Yet, they often decided to price low. A shot in the other foot!
4. This is very interesting: Companies introducing new products with great innovation, the more flexible and innovative the company's business model and pricing strategy.?
5. CEOs of companies with established products or services said they "price to market" or "knew" their customers' willingness to pay for their products. How they could know what the market is willing to pay when no prices are published (as they are for commodities like grain or oil) beats me. They may believe they could ask their customers and get a truthful answer. They may have tested some prices in isolation, as companies typically do, and therefore missed that another set of marketing messages or different customer targeting supports both higher sales volume and higher prices.?
6. None of the CEOs said that CES impacted their pricing strategy.?

So, there is a dichotomy here. On the one hand, companies understand that pricing right is essential and that they should price high and set a price that generates the maximum profit, especially as they would want to re-coup the development and costs of market introduction as quickly as possible. Yet, most decide on a relatively low entry price for their innovation. This is unfortunate for many reasons, one being that setting a relatively low price sets a precedent; if the price and margin are too low, it will be hard (but not impossible) for the company to increase the price.?

In academic pricing theory (void of practical business experience) lives the hypothesis that new products should enter the market at a low price to capture market share. Then, prices should increase once a sufficient market share has been established. Unfortunately, as we established above, this is wrong and is one reason why many new innovative products and companies fail. They simply go to market with a too-low price. A price that does not send a message of quality and value. It does not provide the company with sufficient resources for marketing and developing the market for the new product, nor does it provide enough resources to continue to innovate and delight its customers with excellent customer support.?

A low price also leads to one of the most common mistakes companies with innovative products make. They introduce a new product at a low price. Then, sometime after product introduction, they will look at their sales volume, which will be low because the company sells to early adopters, and there are only a few of those. Look at the resulting revenue, which will also be low because of low sales volume and price. Look at what they promised investors and the bank balance. And then they panic. A panic that, more often than not, will lead the company to the false belief that they need to reduce prices to drive higher sales volume and revenue. But based on the aforementioned expectation bias at even lower prices, sales volume will, at best, stay the same, reducing revenue and decreasing profit margin. The company ends up with even fewer resources to market the new product. With quickly depleting cash reserves, the company faces the daunting task of increasing prices. To undo what they did. Which may or may not work and certainly will require time and resources to make right—time the company doesn't have. So the company dies.?

The bottom line is that when introducing a new, innovative product or service, prices should be set to maximize revenues and profits. It is when profits are needed the most!

Per Sjofors, aka "The Price Whisperer"

Woodland Hills, CA

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