New product adoption speed and its impact on the launch pricing strategy

Background

• For everyday consumer goods, acceptance (rejection) of a new product would be relatively quick.
• In certain industries however, a substantial portion of the target population may take a wait-and-see attitude when considering a new product for adoption. This is especially true for technology-laden products/services wherein market acceptance needs to reach a certain level first before the rest could be enticed to try the new offering.
• In these situations, it is important that the preference modeling be dynamic, taking into account customers’ likely speed of new product adoption.
• This article describes a pricing and value research project that Pricing Solutions Ltd. conducted in this area.

Research Method

Pricing Analysis

• In the pricing analysis, individual customer level utilities, not aggregate utilities, were estimated to enable running market simulations by adoption timeline.
• In terms of preference shares, the first choice method (or the “Maximum Utility Rule”) was used. This method yields results that follow intuitive expectations – the new product’s adoption share increases as more customers adopt it over time (assuming zero customer churn among the early adopters).
• Below is an example of the resulting market adoption for the new product testing different pricing strategies:

• • Note that the more widely used share of preference method (or “Logit Rule”) was not used as its results were counter-intuitive. Adoption shares for the new product decreases over time despite more customers accepting it, likely caused by those customers who would adopt at a later period and have weaker adoption probabilities (vs. the early adopters).

Business Implications

• By applying this pricing research technique and knowing that market adoption will be in phases, companies are in a better position to plan their resources. This is especially important in the first few years of the product launch when majority of the set-up and sales logistical costs are incurred.
• Companies would be more confident about setting a higher launch price for the new product, knowing that its target market penetration would be attained at a (near) future date. Aside from yielding higher margins, such higher price points help companies reinforce the message that their new offering provides better quality/more innovative features than the existing ones.
• The higher price point strategy in this example also minimizes the risk that competitors, with products of lesser value, will react to the new product launch by reducing their own product’s prices. This would have set-off a series of price changes across the competitive set that in the long term reduces the overall economic value of the category.
• Lastly, profiling the early adopters of the new product may be of value to companies. This is particularly true if they are the industry’s likely influencers, facilitating the new product’s acceptance with the rest of its target market.