Pricing and Early Stage Marketing

We sometimes get projects to help start-ups with their pricing.

Often these start-ups have strong patents covering their “first-in-the-world” products. They have high hopes of customers banging down their doors to get their hands on the new product, and they’ve spent many hours in R&D creating their invention to solve a need in the world.

After the initial sales growth, the new product suddenly finds itself facing a plateau in sales growth. So the natural question to ask is what are we doing wrong? Did we set a price too high?  Should we lower our prices?

Fortunately there are strategies for such situations, called early stage marketing. But firstly, how do you identify if you are in such a situation?  Here are four ways:

How New Is New?

Not all new products are really new. According to Booz, Allen & Hamilton (New Products Management for the 1980s, New York, 1982) their survey of 700 US businesses found that the products introduced by those businesses were not equally “new”. The study identified six categories of new products based on their degree of newness as perceived by both the company and the customers:

1. New-To-The-World products – true innovations that are new to both the business and the market segment e.g. electric car
2. New Product Lines – a product category that is new for the company but not new to target customers e.g. hybrid cars
3. Additions to Existing Product Lines – new to the company but familiar to the target market e.g. a Mercedes A190 small car
4. Revisions of Existing Products – functional improvements to an existing product that is already familiar to the target market e.g. modest revision to the Ford Falcon
5. Repositionings – an existing product but re-positioned to a new market segment e.g. BMW Mini Cooper
6. Cost Reductions – product modifications providing a similar product but at a lower cost

Our discussion primarily focuses on the really new products – products that are facing a new market. Therefore, the two categories of interest are the first category – new-to-the-world products – these are new both to the business and the market, and the fifth category – a product repositioning towards a new segment. These two instances would likely give rise to situations where a market has to learn how to use the product in its intended form. According to the study, the percentages of new products that fall into these two categories are 10 percent and 7 percent respectively. Does you product fall into these categories?

Category Selling Needed

The need to sell the category before the product is also another symptom of early stage marketing. For instance, before a salesperson can even talk about his electric car X he has to spend considerable amount of time convincing his potential customer of the benefits of owning electric cars in general. But it is often that once he succeeds in selling the category, the sales of his product is easy since it is the only alternative in that category.

Alternatives Are Vague

Another sign of early stage marketing is that customers, when asked about alternatives they considered before buying your product, will give vague answers like “Oh I did not consider any alternative at all….”  Or they may even be stumped by the question and not provide any answers at all.

Do Nothing

What these answers suggest is that there were really no alternatives in the customer’s consideration set. In fact, the real alternative is doing nothing.  Sometimes customers would answer, “If I did not buy your product then I would probably just use the old fashioned manual way of___, which I’d rather not do…”  The “rather not do” answer is another giveaway that the real alternative is to “do nothing”.

And that’s really what’s causing the slow growth – do nothing. Customers put off the buying decision until they are appropriately educated on the benefits of the category. Then, and only then will they start seriously looking out for specific products within the category – like yours.

So there you have it — simple test to gauge whether your company and product are in the early stage marketing phase and suffering from symptoms of being a first-mover.

Being a first-mover has its advantages – order of entry and market share is causally related (Urban and Star, 1991). Unfortunately just being the first to enter a market does not necessarily guarantee the benefits of a first-mover. The factors involved in enjoying the benefits of a first-mover are usually more complex (First-Mover Advantage: A Synthesis, Conceptual Framework, an Research Propositions, Kerin, Rajan & Peterson, Journal of Marketing, October 1992).

There are clear and progressive strategies that you can take to capitalize on the situation and move forward decisively.