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PRODUCT LIFE CYCLE PRICING
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Page 1: Product Lifecycle Pricing- 2011

PRODUCT LIFE CYCLE PRICING

Page 2: Product Lifecycle Pricing- 2011

The four stages launch

growth

maturity

decline

competition and pricing in each stage

Pricing and the product life cycle

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fig

O

Sale

s pe

r per

iod

Time

The stages in a product’s life cycle

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fig

The stages in a product’s life cycle

O (1)Launch

(2)Growth

(3)Maturity

(5)Decline

Sale

s pe

r per

iod

Time

Product notbecomingobsolete

Productbecomingobsolete

(4)Saturation

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

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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 reducingFirms make innovation just when existing product is about to enter saturation stage and new product life cycle starts

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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 salesGrowth stage: rapid expansion in sales, can be sustained only by maintaining quality

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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 promotionSaturation stage: sales volume ceases to grow, only replacement demand

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Stages of a product life cycle….

Decline stage: sales volume goes down, competitors have entered the marketChanges occur in the Price elasticity of demand, Promotional elasticity, production & distribution costs

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PRODUCT LIFE CYCLE

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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 developmentA mature stage of product development

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Pioneer PricingProblems in pricing in early stages:Estimating demandFinding competitive range of pricesDiscovering volume of sales at different pricesConsidering possibility of retaliation

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Pioneer PricingTwo main lines of strategy open:Skimming pricingPenetration pricing

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Skimming pricingSet a high price for a while & ”milk” the customers who are willing to payAfter competitors have entered reduce the priceCharge as much as buyers will pay initially & at a later time to charge lessIt usually follows from temporary monopoly power due to innovation or advertisingDue to a less elastic demandBut market becomes attractive due to higher price and initial firm may lose its advantage in the long run

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Skimming

Price declines over timeThose who wish to get it first pays the highest price, others are willing to waitExamples: Hardcover & Paperback

Books New electrical,

computer products TIME

P D

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Skimming pricing:Pre conditions

Large segment whose demand is relatively inelasticHigh ratio of variable to fixed costs- unit costs unaffected by small volumeHigh price unlikely to attract competition

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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.

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Price SkimmingAdvantages:Demand likely to be price inelastic in early stagesCan segment the market based on elasticity of demandSafe policy for a new productAdvisable for products with short lifespanAdvisable for products that use complex technology as new firms cannot enter easily

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New Product Pricing: Reasons for Using a Skimming Price

Skimming Price - Charging a High, Premium

Price

Product Benefits that Customers Want at Any Cost.

Little Chance that Competitors Can Enter the Market Quickly.

Several Customer Segments with Different Levels of Price Sensitivity.

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

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Penetration Pricing:Pre conditions

High price elasticityEconomies of scale- low ratio of variable to fixed costLow price likely to discourage competition

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Penetration Pricing

Advantages:Where short period elasticity is highWhere cost of production reduces sharply due to increase in productionWhere 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

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

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Setting Initial Product Prices

Market Skimming Market Penetration

>Setting a High Initial Price for a New Product that is lowered over time to Skim Maximum Revenues from the Target Market.>Results in Fewer,

More Profitable Sales.

> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.>Results in a Larger

Market Share.

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Pricing in Maturity StageReaches this stage when its distinctiveness experiences "competitive degeneration”Consumers’ preferences are reducingIn total sales proportion of replacement demand is more over fresh demand\technology becomes equalizedImitation has reduced product distinctivenessPrice war fatal at this stageReduce the price to the extent demand elasticity permits

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INTRODUCTION

Full-scale launch of new product Sales are low, high failure rateLittle competitionFrequent product modificationLimited distributionHigh marketing and product costsFocus on awareness and primary demandIntensive personal selling to channel

members

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INTRODUCTION

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STRATEGIES FOR INTRODUCTION STAGERapid skimming: High price, high promotionHigher price Higher promotionPotential market unaware of product, willingness to pay highAlso works when market size is largee.g. Consumer electronics, non durablesSkim the cream off the market to reduce break even timeAlso works when strategy is guerilla warfare- vacate before the going gets tough

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STRATEGIES FOR INTRODUCTION STAGESlow skimming: High price, low promotion

Higher priceLower promotionMarket aware of productCompetition not intenseCustomers ready to pay higher prices

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STRATEGIES FOR INTRODUCTION STAGE….

Based on assumption that firm has sufficient time to recover its pre launch expensesWhen technology used is highly sophisticatedMarket size for product limited and those who are aware willing to pay any pricee.g. industrial products, renewable energy sources, laser technology, petrochemicals

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STRATEGIES FOR INTRODUCTION STAGE

Rapid penetration: low price, high promotion

Lower priceHigher promotional levelsMarket is largeCustomers unawareIntense competitionPrice sensitive

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STRATEGIES FOR INTRODUCTION STAGE….

Based on the same assumption as Rapid SkimmingOnly difference is in the firm’s long term objectivesIf it is market share & profit maximization in long run and intensive competition or other entry barriers in market firm can choose this strategye.g. Japanese firms adopted this to launch their products in N America & EuropeIn 1980s S Korea, Taiwan, Hongkong used it to uproot Japan for same marketIndia- Nirma, T series audio cassette

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STRATEGIES FOR INTRODUCTION STAGE

Slow penetration: low price, low promotionGives result when threat from competition is minimal, market size is large, market is price sensitive & familiar with the productObjective is to maximize sales or profits in long run

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STRATEGIES FOR INTRODUCTION STAGE….Lower priceLower promotional levelsLarge marketCustomers aware of productPrice sensitivePotential competition Firm offers only limited version of the product

at the introduction stage e.g. Maruti 800

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GROWTHSales grow at an increasing rateMany competitors enter marketProfits are healthyPromotion emphasizes brand advertising and comparative adsWider distributionToward end of growth stage, prices fallSales volume creates economies of scale

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GROWTH

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STRATEGIES FOR GROWTH STAGE

Aggressive pricing:Price cutsAttract price sensitive customers

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STRATEGIES FOR GROWTH STAGE

Product Benefits:Emphasis on benefitsCreate a niche market

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STRATEGIES FOR GROWTH STAGE

Improvement:Improve product qualityAdding new featuresAdding new modelsOthers changes like color, flavor, size

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STRATEGIES FOR GROWTH STAGE

New channels & marketsIntroduce new distribution channelsIntroduce product into new markets

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MATURITYSales continue to increase but at a decreasing rateMarket is approaching saturationNew models emphasize style, not functionProduct lines are widened or extendedMarginal competitors drop outHeavy promotions - sales promotionsPrices and profits fall

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MATURITY

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STRATEGIES FOR MATURITY STAGE

Products:Abandon weaker productsConcentrate on profitable products

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STRATEGIES FOR MATURITY STAGE

Promotion:Increase advertisingIncrease sales promotionNew packagingProduct re-launches

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STRATEGIES FOR MATURITY STAGE

Improvements:Invest more in R & DImprove ProductImprove Product line extensions

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DECLINESignaled by a long-run drop in salesRate of decline is governed by how rapidly consumer tastes change or how rapidly substitute products are adopted.Falling demand forces many out of marketFew specialty firms left

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DECLINE

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STRATEGIES FOR DECLINE STAGE

Tackling:Reduce no. of products in a product lineReduce promotional budgetsReduce pricesReduce distribution channelsReduce distributorsWithdrawal from weaker segments

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Market Entry Strategies for New Products

Rapid Skimming Slow Skimming

Rapid Penetration

Slow Penetration

High

LowPrice

PromotionHigh Low

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Pricing Strategy Over theProduct Life Cycle

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Assignment on PLCEach student should take a Brand of a ProductStudy the history of the BrandTrace its Life cycleWhat happened to the Brand at various stages of its life cyclePrice changes made in the Brand as it evolvedWhat stage is it now?5-10 minutes power point presentation by each student