As part of my career, I used to have to visit many small businesses wanting to bring a new product into an existing market. Many of these businesses had identified a potential gap in the market but were using pricing and promotional strategies inconsistent with the expectations of their intended customer base and with the identified market gap.
Four basic product launch strategies have been identified and it is important that businesses choose the strategy which best meets their marketing objectives.
The first strategy is Rapid Skimming. This is where a high price has been allocated to a product and a high level of promotional activity is planned. This strategy is used where, for a variety of reasons, it is necessary for the costs of developing a product to be recouped quickly due to rapid changes in the market.
A fine example of a Rapid Skimming Strategy is the launch of the Apple iPhone. This smart phone is sold at a premium price and Apple places a high promotional spend on its products. Apple has chosen a fast skimming strategy because the rapid pace of technological change in their market means that they need to recoup the high costs of developing their products quickly. They also know that they have a large and loyal customer group willing to pay a price premium to have the most up to date device.
A rapid skimming approach is best used where a high price can be applied over a short period of time. When changes in the market force a drop in price a replacement product is hopefully ready to take its place and the price premium can be maintained.
The second strategy is Slow Skimming. This is where a high price is applied but low promotional activity is applied. Rolls Royce, the luxury car manufacturer is a good example of the use of a slow skimming strategy. Rolls Royce do not have expensive high-profile promotional campaigns. Instead, they market products by targeting a select group of customers and using its sales agents and distributors to sell by invitation and personal selling. The speed of change in the market for luxury limousines is far slower than that of a smart phone, so production costs can be recouped at a slower rate. The custom nature of Rolls Royce’s products also means that a premium price can be maintained over a longer period and a high profit margin for each individual product sold is achievable.
The third strategy for marketing a new product is Fast Penetration. This is the strategy used by most branded consumer goods. It involves a high level of promotional activity and setting a low price for goods. The aim is to take a low profit margin for each individual sale but to sell in large quantities. The cost of developing the product can be recouped quickly.
Finally, there is the strategy of Slow Penetration. This strategy is used for products like supermarket own brands and unbranded staple goods. Here the price of goods is low as is the level of promotional activity. It is best applied to goods with a long product life cycle and where costs can be recouped on a low margin over a long period of time.
When bringing a new product to the market, it is well worthwhile considering the earning potential of your product over its life cycle and applying a strategy which prices a product based on its marketing mix rather than just the cost of its development.
Philmus Consulting Ltd can help your business develop strategies and to target market gaps which maximise profitability over the life of a product.