I’ve got a couple questions for you Mark Stiving, Ph.D. :). Not sure if you previously answered similar ones as these. 1) When pricing brand new products, no existing competition, how do you find an optimum price? (E.g. both in terms of price acceptance/adoption and profitability). Jesse
Answer: I’ll share and answer Jesse’s second question in another post. Let’s address this one.
Pricing a revolutionary product is the hardest thing to do in pricing because there are no benchmarks to follow. On the other hand, it’s the easiest because being off a little bit has almost no impact on your sales.
Of course, you want to use value-based pricing, but the challenge is determining the value. The technique I would recommend is Van Westendorp’s Price Sensitivity Meter (VW PSM). You will need to describe your product exceptionally well since people won’t know what it is. I find VW PSM to be particularly effective when you don’t have competition.
There are at least two confounding factors. First, buyers don’t really know how much value they will get. It’s hard to ask them for value when they don’t understand your product yet. Imagine when Apple first released the iPod. People didn’t really understand or maybe believe they would get value from the product. Over time, as more and more people became aware of what it would do for them, more and more people adopted. Knowledge about the product category increased buyers willingness to pay.
Apple had the advantage of being Apple. Many people would buy it and try it just because it was from Apple. Most of us don’t have that advantage. Often we must aggressively price our revolutionary products just to get people to try it. Then, slowly build a following. The good news is the responses you initially get from Van Westendorp’s method will be representative of the value it takes to get someone to initially buy the product. This also means that over time, as buyers become more aware of and comfortable with your product, you will need to do more pricing studies and probably raise your price.
If you have a subscription product, you will want to price aggressively to initially win customers, and then measure the willingness to pay of subscribers after they have learned what your product can do for them. While asking them the VW PSM questions, you may want to commit that you won’t change their prices so they are more likely to be honest.
Another confounding factor is that people adopt new product categories at different rates. As you measure WTP, you will be looking for a small group of people who have the highest WTP, meaning they value your product the most. They will adopt first. Price for them. Don’t try to win the people with lower WTP when you launch.
The question asked for an optimal price. There’s really no such thing in any business. However, having a clear strategy and expectation of adoption will help you grow your revolutionary product quickly and profitably.