Pricing over the

product life cycle

LE S S O N 12
P RICI NG FOR VAL UE
EL KANA E ZEK I EL

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All product cycles start with the launch of a
new product.
But not all new products start a product
cycle.
Why?

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Stages of a product life cycle
1. Introduction
2. Growth
3. Maturity
4. Decline

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 Market introduction
Customer education & information diffusion are critical for an innovative new product
◦ Potential buyers do not know about the benefits E.G. first vacuum cleaner, washing
machine, personal computer
◦ There is reluctance to shift from current habits

Information diffusion
◦ Most of what people learn about the product is from the experience of others

◦ Long run demand depends on the number of satisfied initial buyers

◦ Demand does not begin to accelerate till the first 2%-5% of potential buyers adopt
the product
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 Market introduction
Early adopters
◦ Specific psychographic profile of people to whom later adopters look for
guidance
◦ Identifying these people and ensuring their experience is positive is critical

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 Pricing for market introduction
Price sensitivity
◦ Both early and later adopters are relatively price insensitive

◦ Early adopters tend to buy regardless of price – Esteem, Status, Self-Worth

◦ Later adopters may not buy at any price till they know the experience of others

◦ Consumers’ price sensitivity when they encounter an innovation bears very

little relation to their long-term price sensitivity

◦ Neutral pricing - list price near the relative value for the typical potential user

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 Pricing for market introduction

The primary goal is to establish and define the product’s worth through
effective price and value communication
Should tie into the planned long term pricing strategy
◦ Skim pricing – list price near the relative value early adopters will
experience
◦ Neutral pricing – list price near the relative value for the typical
potential user

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 Communication Of Value Through Trial
Building Promotions
Very useful for certain product Not relevant for all product categories
categories
◦ Durables - can’t afford to give product
◦ When product is purchased away & wait years for repeats
frequently ◦ Many products will not reveal their value
when sampled only once – Tonics &
◦ Has low incremental production supplements, smoke alarms, insurance
cost policies

◦ The benefits become obvious ◦ Some products need the user to learn
after just one use new skills before they can use it - smart
e.g. new flavors, fragrances, OTC phones for a feature phone user

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 Communicating Value Through
Direct Sales Force
For innovations involving large outlay
Deploy a direct sales force to evaluate
buyer needs and explain how the product
will satisfy them
◦ First to the world durables; Eureka
Forbes
◦ American Airlines Airfreight -
explained how adoption would help
get rid of local warehouses
Complex innovations  High degree of
uncertainty and risk
◦ SAP - increased adoption rates by connecting
new customers to successful installations &
partnering with integration specialists
◦ DuPont - for many synthetic fabrics &
specialty plastics  Partnered with client for
product development and manufacturing
None of them reduced prices!
◦ Funded the high cost of education & service
with the high prices of the product
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 Communication/Marketing Through
Distribution Channels
An alternative strategy is to work with external channel partners e.g. Distributors, Direct Sales Dealers, etc.

The Innovator will train and support the channel partner

STRATEGIES

◦ Give distributors & retailers high margins – As compensation for time invested in customer education and
product detailing

◦ Danger of price cutting if there are too many distributors

◦ “Resale price maintenance” - refuse to deal with those who discount during the innovation stage

◦ Allow discounting, but pay incentives for various programs the company wants to run

◦ Co-op advertising, in-store displays, promoters, on-site service and demonstration

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Growth Stage
 Competition starts entering the market
 Buyers start looking at the product’s costs & benefits vs.
competitive brands
 Firms can choose between two extreme strategic end points

Pure differentiated Pure low cost

product strategy strategy

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 GROWTH STAGE
• Differentiated product strategy
• Product uniqueness to counter price competition – Apple; Gillette, Nike
• Low cost strategy – Focus on developing products with the lowest COGs
• Customers start becoming price-sensitive & prices may trend downward slowly
• More competition + customers more familiar with product to evaluate choices
• Sales base expands rapidly as new firms enter and existing firms continue to grow
• Extreme price cutting is not common yet – need to be prepared strategically
 Pricing for Growth:
Differentiated product strategy
If the strategy is focused, then it is possible to adopt market skimming prices to the
segments that value the product most highly

◦ Godiva, Gucci, Chanel, BMW

If strategy more broadly aimed at multiple segments neutral pricing would be appropriate

◦ P&G, Honda, Tata Motors

Penetration pricing also an option – Sacrifice unit profit for quicker volume buildup

◦ Company adopts penetration pricing to lock in a large market share before competition
can match their differentiated product features

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 Pricing for growth:
Cost leadership strategy

Cost-leadership can be either focused or broad based

Broad-based - When the source of the anticipated cost
advantage depends on selling a large volume
 Stage 1: Penetration pricing to gain share & achieve cost
advantage
 Stage 2: Penetration pricing as a competitive deterrent, while
earning good profits due to the cost advantage e.g. Walmart

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 Pricing for growth:
Cost leadership strategy
Penetration pricing can be set even when the cost advantage is not due to high
volumes, but driven by more cost-efficient product design & operations
◦ Japanese success in electronics replicated by Korean brands

Caution - if a market is not price-sensitive, penetration pricing will not help a firm
gain sufficient share to achieve/exploit a cost advantage
◦ Neutral pricing is a better option here
◦ R. J. Reynolds in cigarettes and Honda in electric generators

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 Maturity stage
Many products do not get this far
◦ Unable to establish a strong competitive
position
Price competition increases significantly
◦ Brand loyalty reduces as buyers perceive low
product differentiation
◦ Homogenization happens, as successful
product designs, technologies & marketing
strategies are imitated
◦ Lower category risk & higher price
sensitivity of buyers attracts new players
that compete on price, leveraging efficient
production and distribution skills e.g.
generic pharma, industrial consumables,
etc.
Companies will strongly defend shares to
avoid being overwhelmed by sunk costs of
their investments
Any share loss leads to absolute sales
declines
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 Pricing during Maturity
Pricing focus is on protecting profit margins by exploiting competitive advantages

Ways in which firms can improve their pricing effectiveness:

◦ Unbundling products & services

◦ Improved estimation of price sensitivity can lead to significant profit improvement

◦ Improved control & utilization of costs

◦ Expansion of the product line: Address untapped segments

◦ Re-evaluation of distribution channels

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Pricing in market decline
Characterized by shrinking demand as customers migrate to
alternative & often superior solutions
When an industry’s production costs are largely fixed & sunk,
prices fall drastically as firms try to sustain capacity utilization
Such price cuts rarely stimulate demand  Create erosion of
industry-wide profitability
 Where production costs are largely variable, reduced demand
has little effect on prices

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 Pricing strategies in market
decline
Retrenchment
◦ Carefully planned & executed to put firm in a more viable competitive position

◦ Make the company leaner & more defensible by liquidation of non-performing

assets & exit from weakest markets

Harvesting - a phased withdrawal from an industry

◦ Starts by exiting its weakest offerings

◦ Prices to maximize its income & treats its competitive position as a “cash cow”

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 Pricing strategies in market
decline

Consolidation – Attempt to gain a stronger position in a declining

industry
◦ Viable for firms with strong financial positions, that enable them
to weather the storm
◦ Post shake-out, the firm has a higher share in a less competitive
market

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Thank You

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