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In most companies, it is the marketing group that determines pricing and margins using spreadsheets, pro forma models, market analyses, and other techniques. In many instances, new product development costs may involve significant capital spending. Capital spending usually involves depreciating the costs over time and detailed models projecting costs and revenues over time are common.

Several techniques that can assist in determining price can also include competitor analysis and focus groups. If you know what your competitor’s charge for a similar product, you have a starting point. Can you charge less and still be profitable? Will your product be so innovative as to pass your competitor allowing you to charge more?

Customer focus groups can provide insight as to what people are willing to pay for your product. Generally, a focus group will consist of a dozen potential customers, selected by your company, that will be introduced to advance notice of your new product. A few typical questions for your firm to ask includes:

 What features would you want in this product?

 Does this product fit your budget at $ ______.?

 What are your initial impressions?

 Do you like this more than the product you use now?

 If adding more features, what would you be willing to pay?

While a focus group can uncover many customers’ likes and dislikes, pricing is clearly one of those attributes. Further, a series of focus groups, usually four or five, will help present a clear picture of market acceptance, pricing, general appeal, etc. Similar to market segmentation, focus groups can also be segmented with different groups according to income, age, etc.

In product development, there will always be costs to recover. Table 2.3 provides a listing of costs expended during development. Note that this is a general guide and is not an all-inclusive list.

Table 2.3 Typical Costs Expended in Product Development.

Quality – QAQCTesting services or lab timeTravel expensesRegulatory complianceLegalPermittingRaw materialsMarketing and advertisingCorporate overhead

LaborCapital equipmentTesting equipmentEngineeringR&DEquipment rentalsExpendablesTraining

Table by David Tennant

All of the above costs must be recovered and reflected in the price of your product over time. It is important that a company recovers its development costs plus a margin; otherwise, your product is not profitable. It is likely that cost and pricing sensitivity analysis will determine the maximum amount of dollars that can be expended and remain profitable in a competitive marketplace.

Figure 2.5 shows a typical break-even graph for a product. Break-even is the point at which sales revenue equals all the costs expended; and additional sales will generate a profit going forward.

Figure 2.5 Breakeven Point. Source: Corporate Finance Institute (2021) / with permission from CFI Education Inc.