The development of a new product was much lengthier and more expensive than the company's management anticipated.

Consequently, the firm's top accountants and financial managers argue that the firm should raise the price of the product 10 percent above its original target to help recoup some of these costs. Does such a strategy make sense? Explain carefully Answer: First, its necessary to define product development It is the term used to describe complete process bringing a new product (a set of benefits offered for exchange and can be tangible or intangible) to market. The development of a new product can sometimes be lengthier and more expensive than originally planned but companies should be much prepared for this. Some companies in trying to guard against this adopt different strategies to either mitigate the loss or recoup some of the cost. Some, as we have in our assignment try to increase the price of the product. But is this the right strategy. How helpful or sound is this sort of strategy? Often times a firms growth potential lies in its ability to develop and market additional products that fulfil a specific, unmet need while still remaining focused on its core value proposition. In order to develop and launch a new product successfully, a well executed strategy is essential. It is important to create a system to keep everyone on the same page throughout the process so information is dispersed accurately. While a company can be understandably anxious to get a product out, previewing the product at a trade show event in advance will help gauge the interest and secure set up the actual launch for even better results. While the development and introduction of a new product can be very exciting process, it can also be stressful if things dont go as planned. Many companies rarely have little idea as to what their true cost is to develop a

new product and this is because, in most cases the companies itself may not be the product developers. They perhaps develop ideas for the new products, but the process of product development isnt their core competency and therefore dont have the systems and procedures to control measure the efficiency and cost of their product development efforts. To get at the real costs of product development, firms would benefit from looking at the situation from different perspectives:
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The amount of money actually spent to develop a product The effect of time to market on the value of the new product investment

The cost of inefficiencies in the product development process.

It should also be noted that the development of a product has the following phases: Phase 1: Concept or idea generation and proof of concept, which includes generating product ideas, market analysis and establishing technical feasibility. Activities in this phase identify the technology to be used and provide marketing information, such as cost and pricing targets and estimated production volume. Phase 2: Definition, the technical and marketing efforts needed to generate a complete product specification. Phase 3: Implementation, including all design and engineering needed to get from product specification to first product off the manufacturing line. Phase 4: Pricing the new product which includes, impact of the new product on the entire product portfolio, value analysis (both internal and external), competition and alternative competitive technologies, differing value segments (price, value and need), product costs (fixed and variable) and the forecast of unit volumes, revenue and profit.

So is increasing the price of the product the right strategy? Is increasing the price the right way to increase profits or recoup costs? The objective of any business is to generate revenue, which leads to profits. If there are no profits the business will not be able to survive. There are a number of reasons why profits might decline including increased expenses, increased cost of goods, and a reduction in sales. When profits falter many businesses automatically look to increase the product cost with the idea this will increase profits. While it is possible to get the outcome that the firm is looking for, it may also backfire because a product price increase even by a small margin consumers are likely to begin to look elsewhere for alternatives. Factors that may influence a product pricing strategy 1. The level Of Competition Some firms fancy the concept of selling their products with a very high margin. This idea can only be realistic when the firm has a monopolistic hold on the market. But if not, they cant sell with the desired profit margin without getting a sting from competition. 2. Perceived value of the product This is another factor that must be taken into consideration before setting a price for a new product. The first step is to ask this question "what is the perceived value of the product in the heart of the customer? Firms must strive to find a good and definite answer to this question before fixing a price for their product. The reason perceived value is a critical factor to consider in a product pricing strategy is because customers often associate low price with low quality. Meaning, if the product is priced too low, the customers tend to feel the materials used in producing the goods is inferior and so therefore, the product is of low quality. So before fixing a price for a new product, the firm should make sure they strike a balance between the price of their product and its perceived value. 3. Product development cost
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This is definitely a factor that should be taken very seriously. With respect to normal business and market economics, firms should never price their product below its actual cost price. The actual product cost price is determined by the total cost of production including tax, divided by the total number of products produced. But in this case, we are not talking about production cost but the about the product development cost; a cost incurred from research and experimentation, a cost thats usually incurred when bringing an innovative product to the market. In most or some cases, newly introduced products usually command a high price. This high introductory price is based on two reasons: a. The first reason for the high product price is due to lack of

competition. Since the product is the first of its kind in the market place, there will be less or no competition thereby giving room for the company to fix price. b. The second reason is this; a high price will enable the manufacturer the heavy investments channeled into the research and

recover

development of the product. 4. Economic trend This is another unavoidable factor that can influence the pricing of a product. Firms should know that economic factors such as taxation rate, labor cost, inflation rate, and currency exchange rate, government's fiscal and monetary policy will definitely influence the adopted product pricing strategy either positively or negatively. 5. Level of market demand In business economics, if demand exceeds supply, there tends to be a mad rush for the few available products, thus inflating the price of the product and vice versa. Some companies even go as far as creating artificial scarcity in order to gain a stronger hold on the industrial price level. 6. Demographics
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The demographics of the targeted customers will indisputably influence the pricing of the product. In our assignment, the firms top accountant and financial managers have argued to increase the price of the product by 10% which in my opinion is not the correct strategy. The development costs are already a sunk cost (i.e. a cost that has been incurred and cannot be reversed) and are irrelevant for pricing decision. Sunk cost should not be considered when making the decision to continue investing in an ongoing project, since the cost cannot be recovered. However, many managers continue investing in projects because of the sheer size of the amounts already invested in the past. They do not want to "lose the investment" by curtailing a project that is proving to not be profitable, so they continue pouring more cash into it. Rationally, they should consider earlier investments to be sunk costs, and therefore exclude them from consideration when deciding whether to continue with further investments. The pricing of the product should be based on the relevant cost in conjunction of the demand of the product. The strategic pricing of the product is such an important part of a business building process that its importance can never be over emphasized. This is because the price of a product can either break or make the business so it should be implemented with little or no room for errors. Wal-Mart for instance have gained and retained leadership position in its industry simply because of their unique pricing strategy. They devised a unique pricing strategy that set them apart and gave them competitive edge. A firm's new product development efforts are shaped by its size, as well as the nature of the industry in which it operates. Various studies suggest that between 50 and 80 percent of new products failthe greater the rate of new product development, the higher the failure rate. Although there are numerous reasons why new products fail, faulty management and planning are at the core of most failures. Therefore, managing the new product development process is a key to a healthy organization.
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Reference: www.fastcompany.com http://www.enotes.com/management-encyclopedia/new-product-development/print http://www-935.ibm.com/services/ch/bcs/pdf/scm-perfect-prod-launch.pdf http://www.nmoa.org/articles/dmnews/developinganewproduct.htm http://en.wikipedia.org/wiki/New_product_development http://runapptivo.apptivo.com/is-increasing-product-price-the-right-way-to-increaseprofits-1315.html http://www.strategicbusinessteam.com/small-business-marketing-strategy/7-criticalfactors-that-will-influence-the-pricing-of-your-product/