To date, research on new product pricing has predominantly been
approached as a choice between market skimming and penetration pricing.
Despite calls for research that addresses other complexities in new
product pricing, empirical research responding to these calls remains
scarce. This paper examines three managerial price-setting practices for
new products, i.e., value-informed, competition-informed, and
cost-informed pricing. By engaging in these practices, managers can
develop and compare quantifications in order to attain an introduction
price for the product. The authors draw on consumer price perception
literature, Monroe's pricing discretion model, and numerical cognition
literature to develop hypotheses about the impact of price-setting
practices on new product market performance and price level. By studying
the effects on market performance and price level, the paper provides
insights that may help explain the growth of new products and address
the problems of underpricing. The hypotheses are tested in a management
survey of 144 production and service companies. The results indicate
which pricing practices are superior for the achievement of either
higher market performance or higher prices in specific product and
market conditions. Whereas value-informed pricing has an unambiguous
positive impact on relative price level and market performance, the
results also suggest that in many cases engaging in value-informed
pricing is not enough. The effects of cost-informed and
competition-informed pricing may differ depending upon the objective
(market performance or higher prices), product conditions (product
advantage and relative product costs), and market condition (competitive
intensity). Engaging in inappropriate pricing practices leads to a
decline in new product performance. Moreover, bad pricing practices make
the positive effect of product advantage on the outcome variables
disappear. The latter finding suggests that companies can jeopardize
their efforts and investments in the new product development process if
they engage in the wrong price-setting practices. The findings imply
that managers should consider different factors in new product pricing.
First, when launching a new product, they should determine their
explicit pricing objective, either stressing market performance or a
higher price level. To determine the most appropriate pricing practices,
however, they should next assess their situation in terms of product
advantage, relative product costs, and competitive intensity. Together
with the pricing objective, these conditions determine the best pricing
practice. On a higher level, the findings imply that companies should
invest in knowledge development in order to engage in the appropriate
pricing practices for each product launch. [ABSTRACT FROM AUTHOR]