It’s very exciting for a company to enter the market with an innovative product or service, one that is bound to shake up the competition and impress the customers. But how should you price a new product? You might have a habit of setting prices to be similar to the competition but what if there is no direct competition for the product. What if it truly is unique? When you begin offering an innovative product, you should consider using Price Skimming, Variable Pricing, or What the Market Will Bear to set your price.

Price Skimming

One approach to pricing for innovative products is called Price Skimming. It’s a matter of setting prices at a higher level for a limited period of time before lowering prices to a more competitive level. This approach works when you have customers who are early adopters who see your new product or service as a "must have" item. Early adopters are often price insensitive and will pay the extra money just to be able to use the item sooner. The big advantage of price skimming is that it helps repay research investment faster, and for a startup or growing entrepreneurial firm, the additional cash flow could be very important.

Electronics firms often use price skimming. HP uses the method to price new printers and computers. We also see price skimming in products like cell phones. One thing you must be careful of is how fast the prices are lowered. Apply got into trouble with its customers when it introduced the original iPhone at $400 each and then within a short time lowered the price to $200. The early adopters did not mind paying the higher price but they felt ripped-off because they did not enjoy the exclusive club of owning an iPhone very long before everyone else had one.

Variable Pricing

Another common pricing strategy is Variable Pricing. It involves setting prices differently depending on the customer. Volume discounts are an example of this method. Giving a discount for larger volumes may be particularly important to startup firms that are trying to reach a break even sells quantity. Larger runs also reduce fixed costs per unit and allow the firm to be more competitive on prices overall. If a firm chooses to use variable pricing, it is best to know quite a bit about the customers’ pricing sensitivity. Offering lower prices to customers who are not price sensitive will only cause a firm to lose profits while raising prices to customers who are price sensitive will cause customers to opt for products and services from someone else.

What the Market Will Bear

The third technique for setting prices is What the Market Will Bear. This approach is intuitively appealing to some entrepreneurship because it fits into the micro-economics concept of supply and demand. If there is demand for the product at a high price, then that’s what the entrepreneur offers. If not, then the entrepreneur lowers the price. While this approach seems logical, profits from this method may vary widely. If the market will not bear a high price, and the entrepreneur has relatively high costs, then this approach assures operating at a loss. On the other hand, if the market will bear high prices, then you will likely make a profit, sometimes large profits.

I knew an entrepreneur who owned a coatings business. His company took used parts and coated them to make them perform better than new. Because the parts were expensive to purchase new, customers were willing to pay lots of money for the re-manufactured part. Fortunately for the entrepreneur, his costs were pennies per part. When I asked the person how they determine the price, he glibly stated, "I gouge them." While his statement was intended to be dramatic, his point was that the customers were getting a bargain at almost any reasonable price he could offer his services.

Positive Customer Relationships

Pricing is a very strategic decision for most entrepreneurial firms. Setting the proper price the first time can allow you to build positive relationships with customers and provide positive cash flow on which to build the business. Although a poor pricing strategy can be and should be changed, you must guard against frequent changes to pricing approaches to avoid confusing customers. Therefore you should make sure you use the best pricing strategy the first time.