The factors that influence pricing strategy change over the life of a product concept. The market defined by a product concept passes through four phases: development, growth, maturity, and decline. Briefly, the changes in the strategic environment over those phases are as follows: Market development. Buyers are price insensitive because they knowledge of the product’s benefits. Both production and not a threat since the potential gains from market development exceed those from competitive rivalry. Pricing strategy signals the product’s value to potential buyers, but buyer education remains the key to sales growth. Market growth. Buyers are increasingly informed about product attributes either from personal experience or from communication with innovators. Consequently, they are increasingly responsive to lower princes. If diffusion strongly affects later sales, price reductions ca substantially increase the rate of market growth and the product’s long-run profitability. Moreover, cost economies accompanying growth usually enable one to cut price while still maintaining profit margins. Although competition expansion, generally precluding the advent of price competition. Price-cutting to drive out competitors may occur, however. Cost advantages associated with sales volume are substantial if current market share is expected to determine which competing technology becomes the industry standard, or if capacity outstrips sales growth.market, strategy, price, competition

Adrian Micu

Angela Eliza Micu

English

Research Papers in Economics

THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           
FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          
MARKETING INNOVATION THROUGH PRICE
Adrian MICU*, Angela-Eliza MICU**
*Department of Management-Marketing
**Department of Finance and Economic Efficiency 
Dunãrea de Jos University of Galaţi, Romania
mkdrad    rianmicu@yahoo.com    
The factors that influence pricing strategy change over the life of a product concept. The market 
defined by a product concept passes through four phases: development, growth, maturity, and 
decline. Briefly, the changes in the strategic environment over those phases are as follows:
Market development. Buyers are price insensitive because they knowledge of the product’s benefits. 
Both production and not a threat since the potential gains from market development exceed those 
from competitive rivalry. Pricing strategy signals the product’s value to potential buyers, but buyer 
education remains the key to sales growth.
Market growth. Buyers are increasingly informed about product attributes either from personal 
experience or from communication with innovators. Consequently, they are increasingly responsive 
to lower princes. If diffusion strongly affects later sales, price reductions ca substantially increase the 
rate   of   market   growth   and   the   product’s   long-run   profitability.   Moreover,   cost   economies 
accompanying growth usually enable one to cut price while still maintaining profit margins. 
Although competition expansion, generally precluding the advent of price competition. Price-cutting 
to drive out competitors may occur, however. Cost advantages associated with sales volume are 
substantial if current market share is expected to determine which competing technology becomes the 
industry standard, or if capacity outstrips sales growth.
Keywords: market, strategy, price, competition
1. Pricing the innovation for market 
introduction
An innovation is a product so new and unique that 
buyers find the concept somewhat foreign. It does 
not yet  have a  place in buyers’  lifestyles  or 
business   practices.   Consequently,   the   market 
requires   substantial   education   before   buyers 
recognize a product’s benefits and accept it as a 
legitimate way to satisfy their needs. The first 
automobiles, vacuum cleaners, and prepackaged 
convenience   foods   initially   had   to   overcome 
considerable   buyer   apathy.   The   first   business 
computers had to overcome skepticism bordering 
on   hostility.   Today,   innovations   from   home 
banking to video conferencing have encountered 
similar   consumer   reluctance,   despite   their 
legitimate   promise   of   substantial   value.   An 
innovation requires buyers to alter the way they 
evaluate   satisfying   their   needs.   Consequently, 
before a product can become a success, its market 
must be developed through the difficult process of 
buyer education.
Not all new products are innovations, at least from 
a   marketing   perspective.   Sometimes   a   new 
product results from a technological breakthrough 
that simply lowers the cost of a product concept 
already well accepted among buyers. In 1909 
Ford’s Model T was a new product born in the 
technology of mass production, but its forerunners 
had already paved the way for its acceptance by 
consumers.   Sometimes   a   new   product   simply 
improves on an already well-established concept, 
as  was  the   case   with   the   3.5   inch   computer 
diskette, the plain paper fax and the digital watch, 
all   of   which   required   little   or   no   market 
development [1]. Even when a 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 
whit little hesitation by both doctors and patients.
A new product that embodies a new concept for 
fulfilling buyers’ needs is an innovation whose 
success requires buyer education. An important 
aspect   of   that   educational   process   is   called 
information diffusion. Most of what individuals 
learn   about   innovative   products   comes   from 
seeing and hearing about the experiences of other 
[2]. The diffusion of that information from person 
to person has proved especially influential for 
large   expenditure   items,   such   as   consumer 
This paper is recommended to be published by Prof. Niculae NICULESCU, PhD. 103THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           
FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          
durables, where buyers take a significant risk the 
first time they buy an innovative product. For 
example,   an   early   study   on   the   diffusion   of 
innovations found that the most important factor 
influencing a family’s first purchase of a window 
air conditioner was neither an economic factor 
such as income nor a need factor such as exposure 
of bedrooms to the sun. The most important factor 
was social interaction whit another family that 
already had a window air conditioner [3]. 
Recognition of the diffusion process is extremely 
important in formulating a marketing plan for two 
reason:   First,   when   information   must   diffuse 
through a population of potential buyers, the long 
run demand for an innovation product at any time 
in the future depends on the number of initial 
buyers. Empirical studies indicate that demands 
does not begin to accelerate until the first 2 to 5 
percent of potential buyers adopt the product [4]. 
The attainment of those initial sales is often the 
hardest   part   of   marketing   an   innovation. 
Obviously, the sooner the seller can close those 
first sales, the sooner he or she will secure long-
run sales and profit potential. 
Second, the “innovator”, people who try new 
product early, are not generally a random sample 
of buyers. They are people particularly suited to 
evaluate the product before purchase. They are 
also   people   to   whom   the   later   adopters,   or 
“imitators”,   look   for   guidance   and   advice. 
However, even innovators know little about how 
attributes or major attribute combinations should 
be   valued.   Marketing   effects   can,   therefore, 
readily influence which attributes drive purchase 
decisions and how those attributes are valued. 
Identifying the innovators and making every effort 
to ensure that their experience is positive is an 
essential part of marketing an innovation [5].
What is the appropriate strategy for pricing an 
innovative new product? To answer that question, 
it is important to recognize that consumers’ price 
sensitivity when they first encounter an innovation 
because they tend to use price as a proxy for 
quality   and   because   there   are   usually   no 
alternative   brands   with   which   to   compare. 
Moreover, until they learn about the product’s 
benefits, they may not even recognize a need for 
it. They lack a reference for determining value 
and to evaluate what would constitute a fair or 
bargain   price.   Consequently,   most   potential 
buyers are understandably unimpressed by a low 
price relative to the product’s value, while the 
innovators are often undeterred by a high one.
It is ironic, therefore, that the greatest innovation 
of the past decade, the internet, was promoted as a 
channel   for   discounting.   In   fact,   researchers 
discovered that, as in other cases, most users did 
not switch to internet shopping to save money, but 
to save time and to get access to a broader array of 
goods and services. Not surprisingly, then. Most 
internet   venture   failed.   The   few   that   have 
succeeded offer unique products or a business 
model   that   vastly   enhances   the   value   or 
convenience   of   the   shopping   experience. 
Although   grocery   delivery   companies   in   the 
United States took the discount road and failed, 
Tesco in Great Britain has succeeded with a high-
service, full-price model. Similarly, Indulge.com 
and DRessmart.com cater profitably to customers 
looking for unique clothing for which they are 
willing to pay top dollar. Consequently, although 
those sites have remained small, they became 
profitable quickly.
Given the problem of buyer ignorance, the firm’s 
primary goal in the market development stage is 
to   educate   potential   buyers   concerning   the 
product’s worth. Consequently, the regular or list 
price   for   a  new   innovation   should   be   set   to 
communicate   the   product’s   value   to   the 
marketplace. It is the price that a seller believes 
satisfied buyers would pay for a repeat purchase. 
It given buyers a reference from which to estimate 
the product’s worth and assess the value of price 
discounts and future price reductions. If the seller 
plans a skim-pricing strategy, the list price should 
be near the relative value that price-insensitive 
buyers will place on the product. If the seller plans 
a neutral strategy, the list price should be near the 
relative value for the more typical potential user. 
The seller of an innovation should not set a list 
price for market penetration, how-ever, since the 
low price sensitivity of uninformed buyers will 
make that strategy ineffective and may, due to the 
price-quality   effect,   damage   the   product’s 
reputation.
2. Marketing Innovations Through Price-
Induced Sampling
Whether the list price is the actual price firs-time 
buyers   are   asked   to   pay   is   another   question 
This paper is recommended to be published by Prof. Niculae NICULESCU, PhD. 104THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           
FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          
entirely. The answer should depend on the relative 
cost of different methods for education buyers 
about the product’s benefits. If the product is 
frequently   purchased,   has   a   low   incremental 
production cost, and its benefits are obvious after 
just one use, the cheapest and most effective way 
to educate buyers may be to let them sample the 
product. For example, America Online built its 
commanding   market   share   by   sending   every 
family in America a mailing, including a diskette, 
for a thirty-day, free, trial membership.
Not all innovative products can be economically 
promoted by price-induced sampling, however. 
Many innovations are durable gods for which 
price cutting to induce trial is rarely cost-effective. 
A seller can hardly afford to give the product 
away and then wait years for a repeat purchase. 
Moreover,   many   innovative   products,   both 
durables and nondurables, will not immediately 
reveal their value when sample once. Few people 
who sampled smoke alarms, for example, would 
find them so satisfying that they would yearn to 
buy more and encourage their friends to do the 
same.   And   many   innovations   (for   example, 
personal   computers)   require   that   buyers   learn 
skills   before   they   can   realize   the   product’s 
benefits.   Without   a   marketing   program   to 
convince buyers that learning those skills is worth 
the effort and strong support to ensure that they 
learn properly, few buyers will sample at any 
price,   and   fewer   still   will   find   the   product 
worthwhile when they do. In such cases, price-
induced sampling does not effectively establish 
the product’s worth in buyers’ minds. Instead, 
market   development   requires   more   direct 
education   of   buyers   they   make   their   first 
purchases’.
3. Marketing Innovations Through Direct Sales
For   innovations   that   involve   a   large   dollar 
expenditure   per   purchase,   education   usually 
involves a direct sales force trained to evaluate 
buyers’ needs and to explain how the product will 
satisfy them. The first refrigerators, for example, 
were sold door to door to reluctant buyers. The 
first salesperson’s job was to help buyers imagine 
the benefits that a refrigerator offered, beyond 
those that an ice chest was already capable of 
providing. Only then would those first buyers 
abandon   tradition   to   make   a   large   capital 
expenditure on new, risky technology. Business 
buyers are equally skeptical of the value of new 
innovations. In the 1950s, most potential users of 
air freight service thought they had no need for 
such rapid delivery. American Airlines built the 
market for this new innovation by offering free 
logistics   consultation.   American’s   sales 
consultants   showed   potential   buyers   how   this 
high-priced   innovation   in   transportation   could 
replace local warehouses, thereby actually saving 
money [6]. They taught the shippers how to see 
their  distribution  problems  differently,   from a 
perspective   that   revealed   the   previously 
unrecognized   value   of   rapid   delivery   by 
American’s planes.
When the innovation is more complicated than 
refrigeration or air freight, even a convincing 
evaluation of buyers’ need may leave them too 
uncertain about the product’s benefits to adopt it. 
For example, a business computer in the 1950s 
was quite a risky purchase. Even if a buyer was 
certain   about   the   quality   of   the   computer 
hardware,   he   or   she   had   no   assurance   that 
computer system could actually do the billing, 
payroll,   and   production   scheduling   that   the 
salesperson claimed it could do. IBM increases 
the business adoption rate of computers, quickly 
overcoming. Sperry Rand’s three-year lead as a 
mainframe   manufacturer,   by   mitigating   this 
source of uncertainty. IBM did so by marketing as 
a single package the hardware, software, systems 
analysis,   and   employee   training   required   to 
guarantee the benefits its salespeople promised.
Neither American nor IBM priced their products 
cheaply despite their desire for rapid sales growth. 
Instead, they educated their markets, showing why 
their products were worth the price, and they 
aided buyers’ adoption to minimize the risk of 
failure, they funded these high levels value of the 
products. Du Pont has employed this same high-
price,   high-promotion   strategy   in   introducing 
numerous synthetic fabrics and specialty plastics. 
Apple employed it in developing the market for 
personal   computers.   And   the   most   successful 
marketers of industrial robots are using it today 
[7].
This paper is recommended to be published by Prof. Niculae NICULESCU, PhD. 105THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           
FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          
4. Marketing Innovations Thought Distribution 
Channels
Not all product have sufficiently large sales per 
customer to make direct selling practical. This is 
particularly true of innovative products that are 
sold indirectly through channels of distribution. 
However, the problem of educating buyers and 
minimizing their risk does nor go away when the 
product is handed over to a distributor. It simply 
makes   the   need   to   rely   on   an   independent 
distribution network problematic. The innovator 
must   somehow   convince   the   distributors   who 
carry the product to promote it vigorously. Once 
way to do this is with low wholesale pricing to 
distributors. The purpose of the low wholesale 
prices is not for distributors and retailers with high 
margins, giving them an incentive to promote the 
product with buyer education and service. While 
that   works   whenever   distribution   is   relatively 
exclusive, there is the risk whenever distribution 
is less  restricted  that competition will  simply 
cause the extra margin to be passed on in price 
discounts, thus losing the promotional incentive. 
To over come that challenge, innovators may keep 
the margins at normal levels but pay incentive 
fees for stocking new products, for on-site service 
and   demonstration.   They   may   also   offer 
incentives directly to the middleman’s salespeople 
for taking the time to understand and promote the 
product. For example, Cuisinart, Inc., successfully 
introduced its food processors to the United States 
by   giving   retailers   substantial   incentives   for 
promotion.   Department   and   cookware   stores 
responded enthusiastically, spurring sales with in-
store   demonstration   and   classes   in   Cuisinart 
cooking. Millions of consumers then willingly 
paid the Cuisinart’s high retail price once they 
learned it was justified by the product’s benefits.
References
1. William Qualls, Richard W. Olshavsky, and 
Ronald E. Michaels, “Shorting of the PLC – 
An Empirical Test”, Journal of Marketing, 
45(4) (Fall 1981), pp. 76-80
2. See   Everett   M.   Rogers   and   P.   Floyd 
Shomerket, Communication of Innovations, 
2
nd  cd. (New York: The Free Press, 1971); 
Frank M. Bass, “A New Product Growth 
Model for Consumer Durables”, Management 
Science, 15 (January 1969), pp. 215-227.
3. William H. Whyte, “The Web of Word of 
Mouth”, Fortune, 50 (November 1954), pp. 
140-143, 204-212.
4. Rogers and Shoemaker, Communication of 
Innovations, pp. 180-182.
5. See   Everett   M.   Rogers,   Diffusion   of 
Innovations   (New   York:   The   Free   Press, 
1962),   Chapter   7   and   8;   Rogers   and 
Shoemaker,   Communication   of   Innovation, 
Chapter 6; Gregory S. Carpenter and Kent 
Nakamoto, “Consumer Preference Formation 
and   Pioneering   Advantage”,   Journal   of 
Marketing Research, 26 (August 1989), pp. 
285-298.
6. Theodore Levitt, The Marketing Mode (New 
York: McGraw-Hill, 1969), pp. 7-8.
7. See Philip Maher, “Coming to Grips with the 
Robot Market”, Industrial Marketing (January 
1982), pp. 93-98 
This paper is recommended to be published by Prof. Niculae NICULESCU, PhD. 106

Marketing Innovation through Price

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics