Pricing New Products: From Passive to Active Price Setting

McKinsey & Company finds that in their experience, 80-90% of all poorly chosen prices are too low. Meanwhile, in the manufacturing industry, with supply chain disruption and production costs on the rise while customers continue to push for low prices, setting the right price for new products at the beginning has never been more decisive for a company’s financial health. Pricing new products profitably and fairly is a challenge when customers and businesses alike can’t gauge their value.

Here at Pricefx, as a leading cloud-native pricing software company with manufacturing among the industries we serve, we are intimately familiar with the unique challenges manufacturers face when striving to set profitable prices for new products, and we’re here to help.

In this article, we’ll outline why setting new prices is crucial in the manufacturing industry, what needs to be considered when navigating this process to get it right, and finally, introduce some tools that will help manufacturing companies transition from passive to active price setting.

Why Pricing New Products Is Important in Manufacturing

Pricing new products in manufacturing is critical, primarily because customers tend to resist increases once a price is established. Given that customers typically expect prices to remain stable or decrease over time, starting with an inaccurately low price for a new product undoubtedly leads to long-term challenges in recouping costs.

However, the pricing process within the manufacturing industry is complex. A wide net of touch points needs to be considered to establish the right price for a new product, which covers factors such as competitive positioning, cost-benefit analysis,   proposition, retailer requirements, and so on. What’s more, while doing a 1-to-1 product change may be easy, adding new options within a line up (or entirely new product categories) can be where the challenge lies.

Organizations often rely on a handful of people who understand these touch points to manage their pricing, which poses a risk if they leave the  . Even without leaving, these individuals might know why a product is priced the way it is, but the bigger question is whether the sales team can articulate that to a customer.

In short, within the manufacturing industry, setting optimal prices on new products is as important as it is difficult to get right.

Pricing New Products in Manufacturing: What to Keep In Mind

Manufacturers can choose from several approaches to pricing new products, and as we’ve seen earlier, rarely is there a single definitive method or touchpoint. This can be a challenge in companies with high product turnover or volumes of new products or spare parts.

The following strategies are just a few that can be used to set the price right on a newly developed or acquired product.

1.  Create Value

Every discussion with customers should start with the value the product offers. After all, no one wants to pay more unless they feel they’re getting something for it.

Tapping into and responding to a customer’s priorities by introducing features that add value (but contribute little to production costs) goes a long way when defending higher prices. For example, in the automotive manufacturing industry, this could involve adding touch screens or voice controls into new models.

However, to ensure a higher price is truly a win-win scenario on both ends, manufacturers will need to accurately discern a product’s unique position in the market, which brings us to our next point.

2.   Evaluate Competitive Positioning

To keep customers and prevent risk when rolling out a new product, companies should analyze their competitive positioning by assessing how much competitors are charging for comparable products.

Companies can gather competitive intelligence through methods like web scraping, market research, or customer discussions. Keep in mind, however, that these won’t help you build a competitive set, nor tell you the value of the feature differences that might exist. This is the main challenge of competitive intelligence when companies lack a system to capture the results.

3.  Use Internal Benchmarks

Apart from using their peers’ pricing and product offering as a benchmark, manufacturing companies can look to their own predecessor or related product lines as a guide for setting new product prices.

In practice, this looks like taking an existing product priced at $150, removing certain features while adding others, and eventually coming to a $125 product. However, if a company’s  products have been historically underpriced, relying solely on this approach isn’t going to yield profitable results.

Introducing a new product offering is an opportunity to gradually align the entire product lineup with the company’s long-term strategy, even if it may cause short-term mix changes.

4.  Consider Your Approach to Cost

Typically, two approaches to cost evaluation are considered in a manufacturer’s pricing strategy, Standard and Actual Cost:

Standard Cost

The Standard Cost approach involves setting costs annually through a complex process that considers the overall cost of producing a product, including raw materials and labor, sourcing contracts, and more. These costs remain fixed throughout the year, typically adjusting for inflation. However, changes in the market can make these costs less reliable over time; as we know, costs set in Q1 are unlikely to align with the market realities of Q4.

Actual Cost

The Actual Cost approach involves calculating real-time costs, reflecting changes in sourcing costs, raw materials, and freight expenses.  However, while this approach supports up-to-date pricing, it can lead to varying profit margins if prices are set at the beginning of the year based on fluctuating actual costs.

However, regardless of the cost approach, the same challenge arises when setting up pricing for new products: manufacturers can’t wait until inventory is available to receive standard or actual costs for their pricing calculations, as they’ll need to come up with a price before production starts. That demands a significant amount of guesswork in initial cost estimations.

Beyond the first cost estimation, manufacturers often need to make multiple revisions during the process of bringing the products to market. That means repeating the price setting process multiple times before a product even launches. A system can make this process streamlined and efficient, ensuring that no crucial details are overlooked due to time constraints.

5.  Choose The Right Pricing Strategies

In manufacturing, there are a number of pricing strategies that can be leveraged for setting new prices, with Cost-Plus, Supersession, and Value-Based pricing among the most popular.

The right pricing strategies will depend on your company’s business strategy, target market, and product lines, and of course, the competitive landscape it’s operating in at the time. However, ultimately, in an industry where customers are particularly sensitive to price increases, it’s important to clearly lay out your value proposition and do the research upfront to ensure the product price truly reflects the benefits it delivers.

How Pricing Software Can Help in the Transition to Active Price Setting

In the transition to active price setting, pricing software is a powerful tool that manufacturers can leverage to effectively address the challenges associated with pricing new products that we’ve outlined here, and in turn, price for long-term growth.

The following are just a few advantages offered by data-driven pricing tools:

1.  Institutionalization and Democratization of Pricing Knowledge

Pricing software institutionalizes pricing expertise by embedding the knowledge and insights of a company’s in-house pricing experts, such as their pricing strategies and decision-making processes, directly into the software, making high-level expertise accessible to all.

With pricing knowledge democratized throughout the organization, every individual involved in the pricing process not only has access to the same knowledge, but can work together to ensure their company is getting the best price in the market.

2.  Streamlining of Complex Pricing Processes

As we’ve seen, the decision-making process around pricing new products is complex, and pricing software is designed to streamline all the touch points that go into that process. With all of the necessary data centralized in a single location, even intricate factors like bill of material costs (used to calculate the costs of a manufactured item) and competitive positioning are seamlessly integrated to enable pricing experts to price accurately at a fraction of the effort.

What’s more, if the market or the product itself undergo frequent changes during the development phase and requires pricing to dynamically reflect those changes, pricing software ingests those factors and allows for prices to be continuously evaluated.

3.  More Comprehensive Pricing Perspective

With pricing software, companies can adopt a more holistic approach to their pricing with respect to what they can input into a new product’s price portfolio. Software allows for a heightened level of complexity in pricing by supporting multiple competitors and components, varying customer requirements, and complex cost structures.

This broadened perspective supports strategies such as value-based pricing, as companies can pull in several factors to justify the product’s worth beyond its price tag, or dynamic pricing models that require complex algorithms and real-time data.

Explore Your Options With These Pricing Strategies for Manufacturing

By this point, you have learned several strategies for effective pricing new products, both in a general context and by using pricing software.

In manufacturing, given the number of pricing touch points to consider and the equally diverse ways they can be addressed, choosing the right pricing strategies is as important to get right as the tools you use to execute them.

To explore the best pricing strategies in manufacturing (plus more tips on how manufacturers can increase pricing flexibility under volatile market conditions), check out our article below.