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 Time
fig
 The stages in a product’s life cycle
Product not
becoming
obsolete
Sales per period

Product
becoming
obsolete

O (1) (2) (3) (4) (5) Time

Launch Growth Maturity
fig Saturation Decline
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
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- “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
Stages of a product life
cycle….

Introduction stage: product is developed

keeping in mind needs of a set of
consumers- new product, high promotional
costs, low volume sales
Growth stage: rapid expansion in sales,
can be sustained only by maintaining
quality
Stages of a product life
cycle….
Maturity stage: rate of growth of
sales declines, though volume of
sales keeps on increasing, small &
declining number of potential buyers,
increasing amount on sales
promotion
Saturation stage: sales volume
ceases to grow, only replacement
demand
Stages of a product life
cycle….
Decline stage: sales volume goes
down, competitors have entered
the market
Changes occur in the Price
elasticity of demand, Promotional
elasticity, 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
Skimming

Price declines over

time
P D
Those who wish to get
it first pays the
highest price, others
are willing to wait
Examples:
 Hardcover & Paperback
Books
 New electrical,
computer products TIME
Skimming pricing:
Pre conditions
Large segment whose demand is
relatively inelastic
High ratio of variable to fixed
costs- unit costs unaffected by
small volume
High price unlikely to attract
competition
Skimming pricing:
Pre conditions
 The offering is unique enough to be protected
from competition by a patent, copyright, or
trade secret.
 A capacity constraint in producing a product or
service exists.
 An organization wants to generate funds
quickly to recover its investment or finance
other developmental efforts.
 There is a realistic perceived value in the
product or service.
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
New Product Pricing: Reasons for
Using a Skimming Price

Product
ProductBenefits
Benefitsthat
thatCustomers
CustomersWant
Want
at Any Cost.
at Any Cost.

Skimming
SkimmingPrice
Price-- Little
LittleChance
Chancethat
thatCompetitors
CompetitorsCan
Can
Charging
Chargingaa Enter
Enterthe
theMarket
MarketQuickly.
Quickly.
High,
High,Premium
Premium
Price
Price
Several
SeveralCustomer
CustomerSegments
Segmentswithwith
Different Levels of Price Sensitivity.
Different Levels of Price Sensitivity.
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
Penetration Pricing:
Pre conditions
High price elasticity
Economies of scale- low ratio of
variable to fixed cost
Low price likely to discourage
competition
 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
Pricing….
High skimming price needs costly
promotional efforts, low
penetration price requires low
promotional expenditure
High skimming price generates
high cash flow early in the life
cycle
Setting
Setting Initial
Initial Product
Product
Prices
Prices
Market
Market Skimming
Skimming Market
Market Penetration
Penetration
> Setting a High Initial
Price for a New > Setting a Low Price
Product that is for a New Product in
lowered over time to Order to Attract a
Skim Maximum Large Number of
Revenues from the Buyers.
Target Market. > Results in a Larger
> Results in Fewer, Market Share.
More Profitable
Sales.
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
STRATEGIES FOR
INTRODUCTION STAGE
Rapid skimming: High price, high
promotion
Higher price
Higher promotion
Potential market unaware of product,
willingness to pay high
Also works when market size is large
e.g. Consumer electronics, non durables
Skim the cream off the market to reduce
break even time
Also works when strategy is guerilla warfare-
vacate before the going gets tough
STRATEGIES FOR
INTRODUCTION STAGE
Slow skimming: High price, low
promotion
Higher price
Lower promotion
Market aware of product
Competition not intense
Customers ready to pay higher prices
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.g. industrial products, renewable energy
sources, laser technology, petrochemicals
 STRATEGIES FOR
INTRODUCTION STAGE

Rapid penetration: low price, high

promotion
Lower price
Higher promotional levels
Market is large
Customers unaware
Intense competition
Price sensitive
STRATEGIES FOR INTRODUCTION
STAGE….
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.g. Japanese firms adopted this to launch their products in N America
& Europe
In 1980s S Korea, Taiwan, Hongkong used it to uproot Japan for same
market
India- Nirma, T series audio cassette
STRATEGIES FOR
INTRODUCTION STAGE

Slow penetration: low price, low

promotion
Gives result when threat from
competition is minimal, market size is
large, market is price sensitive &
familiar with the product
Objective is to maximize sales or profits
in long run
STRATEGIES FOR INTRODUCTION
STAGE….
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.g. Maruti 800
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
STRATEGIES FOR GROWTH
STAGE

Improvement:
Improve product quality
Adding new features
Adding new models
Others changes like color,
flavor, size
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
STRATEGIES FOR DECLINE
STAGE
Tackling:
Reduce no. of products in a product
line
Reduce promotional budgets
Reduce prices
Reduce distribution channels
Reduce distributors
Withdrawal from weaker segments
Market Entry Strategies for New
Products

Rapid Skimming Slow Skimming

High
Price Rapid Penetration Slow Penetration
Low
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