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Product Lifecycle Pricing- 2011

Product Lifecycle Pricing- 2011

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Published by: Mohamadhu Usman on Apr 07, 2011
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PRODUCT LIFE CYCLE PRICING

Pricing and the product life cycle

The four stages
 launch  growth  maturity  decline

competition and pricing in each stage

The stages in a product’s life cycle

Sales per period
O
fig

Time

The stages in a product’s life cycle
Product not becoming obsolete

Sales per period

Product becoming obsolete

O

(1) Launch

(2) Growth

(3) fig Maturity

(4) Saturation

(5) Decline

Time

PRODUCT LIFE CYCLE
Each Product goes through a life cycle of introduction, growth, maturity, saturation & decline The PLC explains how features change over the life of a product Pricing & Marketing strategies must change and evolve as a product moves through the PLC

“cycle of competitive degeneration” As product moves to the next stages the sellers’ control over prices keeps on reducing Firms make innovation just when existing product is about to enter saturation stage and new product life cycle starts .Pricing over the Life cycle of a product: Stages of a product life cycle Most products have something of a “perishable distinctiveness” whereby they generate into common commodities over time.

Introduction stage: product is developed keeping in mind needs of a set of consumers. low volume sales Growth stage: rapid expansion in sales.Stages of a product life cycle…. can be sustained only by maintaining quality . high promotional costs.new product.

increasing amount on sales promotion Saturation stage: sales volume ceases to grow. Maturity stage: rate of growth of sales declines. though volume of sales keeps on increasing.Stages of a product life cycle…. only replacement demand . small & declining number of potential buyers.

competitors have entered the market Changes occur in the Price elasticity of demand.Stages of a product life cycle…. Promotional elasticity. Decline stage: sales volume goes down. production & distribution costs .

PRODUCT LIFE CYCLE .

Pricing: Stages of a product life cycle On the basis of life cycle a new product can be classified into two stages: A pioneer stage of product development A mature stage of product development .

Pioneer Pricing Problems in pricing in early stages: Estimating demand Finding competitive range of prices Discovering volume of sales at different prices Considering possibility of retaliation .

Pioneer Pricing Two main lines of strategy open: Skimming pricing Penetration pricing .

Skimming pricing Set a high price for a while & ”milk” the customers who are willing to pay After competitors have entered reduce the price Charge as much as buyers will pay initially & at a later time to charge less It usually follows from temporary monopoly power due to innovation or advertising Due to a less elastic demand But market becomes attractive due to higher price and initial firm may lose its advantage in the long run .

computer products TIME .Skimming Price declines over time Those who wish to get it first pays the highest price. others are willing to wait Examples:  P D  Hardcover & Paperback Books New electrical.

unit costs unaffected by small volume High price unlikely to attract competition .Skimming pricing: Pre conditions Large segment whose demand is relatively inelastic High ratio of variable to fixed costs.

An organization wants to generate funds quickly to recover its investment or finance other developmental efforts. copyright. There is a realistic perceived value in the product or service.Skimming pricing: Pre conditions     The offering is unique enough to be protected from competition by a patent. A capacity constraint in producing a product or service exists. . or trade secret.

Price Skimming Advantages: Demand likely to be price inelastic in early stages Can segment the market based on elasticity of demand Safe policy for a new product Advisable for products with short lifespan Advisable for products that use complex technology as new firms cannot enter easily .

Premium Price Price Little Chance that Competitors Can Little Chance that Competitors Can Enter the Market Quickly. Premium High.New Product Pricing: Reasons for Using a Skimming Price Product Benefits that Customers Want Product Benefits that Customers Want at Any Cost. . Skimming Price -Skimming Price Charging a Charging a High. Different Levels of Price Sensitivity. at Any Cost. Several Customer Segments with Several Customer Segments with Different Levels of Price Sensitivity. Enter the Market Quickly.

Penetration Pricing Offering a new product at a low introductory price. “widen the market” by getting customers acquainted with the product When introducing a new product or moving into new geographical market Mass production & wide market will reduce cost of production Goals: (1) to build share and (2) earn profits from future sales .

low ratio of variable to fixed cost Low price likely to discourage competition .Penetration Pricing: Pre conditions High price elasticity Economies of scale.

Penetration Pricing Advantages: Where short period elasticity is high Where cost of production reduces sharply due to increase in production Where product is mass consumption item Results in faster penetration and product adoption Creates early adopter goodwill Creates tremendous cost reduction pressures from the beginning Discourages the entry of competitors • • • • .

low penetration price requires low promotional expenditure High skimming price generates high cash flow early in the life cycle .Pricing…. High skimming price needs costly promotional efforts.

More Profitable Sales. > Results in Fewer. . > Results in a Larger Market Share. Market Penetration Market Penetration > Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.Setting Initial Product Setting Initial Product Prices Prices Market Skimming Market Skimming > Setting a High Initial Price for a New Product that is lowered over time to Skim Maximum Revenues from the Target Market.

Pricing in Maturity Stage Reaches this stage when its distinctiveness experiences "competitive degeneration” Consumers’ preferences are reducing In total sales proportion of replacement demand is more over fresh demand\technology becomes equalized Imitation has reduced product distinctiveness Price war fatal at this stage Reduce the price to the extent demand elasticity permits .

INTRODUCTION Full-scale launch of new product Sales are low. high failure rate Little competition Frequent product modification Limited distribution High marketing and product costs Focus on awareness and primary demand Intensive personal selling to channel members .

INTRODUCTION .

non durables Skim the cream off the market to reduce break even time Also works when strategy is guerilla warfarevacate before the going gets tough .g. high Higher price Higher promotion Potential market unaware of product.STRATEGIES FOR INTRODUCTION STAGE Rapid skimming: High price. Consumer electronics. promotion willingness to pay high Also works when market size is large e.

low promotion Higher price Lower promotion Market aware of product Competition not intense Customers ready to pay higher prices .STRATEGIES FOR INTRODUCTION STAGE Slow skimming: High price.

petrochemicals .g. renewable energy sources. industrial products.STRATEGIES FOR INTRODUCTION STAGE…. Based on assumption that firm has sufficient time to recover its pre launch expenses When technology used is highly sophisticated Market size for product limited and those who are aware willing to pay any price e. laser technology.

high promotion Lower price Higher promotional levels Market is large Customers unaware Intense competition Price sensitive .STRATEGIES FOR INTRODUCTION STAGE Rapid penetration: low price.

Based on the same assumption as Rapid Skimming Only difference is in the firm’s long term objectives If it is market share & profit maximization in long run and intensive competition or other entry barriers in market firm can choose this strategy e.Nirma. Japanese firms adopted this to launch their products in N America & Europe In 1980s S Korea. T series audio cassette . Taiwan. Hongkong used it to uproot Japan for same market India.STRATEGIES FOR INTRODUCTION STAGE….g.

market size is large. market is price sensitive & familiar with the product Objective is to maximize sales or profits in long run . low promotion Gives result when threat from competition is minimal.STRATEGIES FOR INTRODUCTION STAGE Slow penetration: low price.

Maruti 800 .STRATEGIES FOR INTRODUCTION STAGE….g. Lower price Lower promotional levels Large market Customers aware of product Price sensitive Potential competition Firm offers only limited version of the product at the introduction stage e.

GROWTH Sales grow at an increasing rate Many competitors enter market Profits are healthy Promotion emphasizes brand advertising and comparative ads Wider distribution Toward end of growth stage. prices fall Sales volume creates economies of scale .

GROWTH .

STRATEGIES FOR GROWTH STAGE Aggressive pricing: Price cuts Attract price sensitive customers .

STRATEGIES FOR GROWTH STAGE Product Benefits: Emphasis on benefits Create a niche market .

size .STRATEGIES FOR GROWTH STAGE Improvement: Improve product quality Adding new features Adding new models Others changes like color. flavor.

STRATEGIES FOR GROWTH STAGE New channels & markets Introduce new distribution channels Introduce product into new markets .

MATURITY Sales continue to increase but at a decreasing rate Market is approaching saturation New models emphasize style. not function Product lines are widened or extended Marginal competitors drop out Heavy promotions .sales promotions Prices and profits fall .

MATURITY .

STRATEGIES FOR MATURITY STAGE Products: Abandon weaker products Concentrate on profitable products .

STRATEGIES FOR MATURITY STAGE Promotion: Increase advertising Increase sales promotion New packaging Product re-launches .

STRATEGIES FOR MATURITY STAGE Improvements: Invest more in R & D Improve Product Improve Product line extensions .

DECLINE Signaled by a long-run drop in sales Rate of decline is governed by how rapidly consumer tastes change or how rapidly substitute products are adopted. Falling demand forces many out of market Few specialty firms left .

DECLINE .

of products in a product line Reduce promotional budgets Reduce prices Reduce distribution channels Reduce distributors Withdrawal from weaker segments .STRATEGIES FOR DECLINE STAGE Tackling: Reduce no.

Market Entry Strategies for New Products High Price Low Rapid Skimming Rapid Penetration Slow Skimming Slow Penetration High Promotion Low .

Pricing Strategy Over the Product Life Cycle .

Assignment on PLC Each student should take a Brand of a Product Study the history of the Brand Trace its Life cycle What happened to the Brand at various stages of its life cycle Price changes made in the Brand as it evolved What stage is it now? 5-10 minutes power point presentation by each student .

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