Pricing Over the Product Life Cycle

Adapting Strategy in an Evolving Market

By: Souls of Empowerment (S.O.E) Christelle Cassimy Meranda Ramoutar Deniese Drakes Nia Modeste Ebony Anderson Riane Rosales Janine Charles Farray

Agenda
Brief Intro into PLC New Products and the PLC Pricing the Innovation for market introduction Pricing for new products in growth Pricing for established products in maturity Pricing a product in market decline Summary

Developed by Raymond Vernon in 1966 to explain pattern of international trade Products pass through predictable phases Understanding the Product Life Cycle (PLC) can help define a companys long run strategic plan.

New Products and their PLC

STAGE Market Introduction CHARACTERISTICS 1. Costs are very high 2. Slow sales volumes to start 3. Little or no competition 4. Demand has to be created 5. Customers have to be prompted to try the product 1. Costs reduced due to economies of scale 2. Sales volume increases significantly 3. Profitability begins to rise 4. Public awareness increases 5. Competition begins to increase with a few new players in establishing market 6. Increased competition leads to price decreases

Growth

STAGE Maturity

CHARACTERISTICS 1. Costs are lowered as a result of production volumes increasing and experience curve effects 2. Sales volume peaks and market saturation is reached 3. Increase in competitors entering the market 4. Prices tend to drop due to the proliferation of competing products 5. Brand differentiation and feature diversification is emphasized to maintain or increase market share 6.Industrial profits go down 1. Costs become counter-optimal 2. Sales volume decline 3. Prices, profitability diminish 4. Profit becomes more a challenge of production/distribution efficiency

Decline

PRICING THE INNOVATION FOR MARKET INTRODUCTION

Innovation

A unique product that buyers find foreign Not part of the buyers lifestyles Requires one to alter their thinking via the process of buyer education or Information Diffusion.

Information Diffusion

Seeing/ hearing about the product experiences of others. (eg. person to person) Recognition of Information diffusion is extremely important

When information must diffuse through a population of potential buyers, the long run demand for an innovative product at anytime in the future depends on the number of initial buyers. Early adopters are not generally a random sample of buyers. They know little about how attributes are to be valued, therefore value communications and effective programs are attributes used to readily influence which attributes drive those initial purchase decisions and how they are valued
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What is an appropriate Price Strategy?

Important to recognise price sensitivity when one first encounters an innovation, this bears little or no relationship to their long run sensitivity. Problem: Buyer ignorance

Primary goal is to define the products worth through effective price and value communication
It is important to consider the value message that various list price strategies send to the market. In addition to list price, marketers must consider other Value Communication approaches

Value Communication Approaches

1. 2. 3.

Communicating Value with Trial Promotions Communicating Value with Direct Sales Marketing Innovations through Distribution Channels

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Communicating Value with Trial Promotions

Determining actual price on early adopters depends on the relative cost of different methods for educating buyers about the products benefits If products are frequently purchased, has a low incremental cost and its benefits are obvious after just one use the most effective way to educate buyers may be to let them sample the product. A product that requires the buyer to learn skills before they can realize the benefits does not immediately reveal their value when sampled once. Instead market development requires more direct education of buyers before they make their first purchase.
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Communicating Value with Direct Sales

Large dollar expenditure items require education from direct sales force trained to evaluate buyers needs to explain how the product will satisfy them. Salespersons job is to help the buyer imagine the benefits of the product being offered beyond the capability of the other product they may be using. This would lead to them abandoning tradition to make large expenditure on new, risky technology.

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Marketing Innovations through Distribution Channels

Innovator must convince the distributors who carry the product to promote it vigorously. This can be done via low wholesale pricing. Low Wholesale Pricing leaves distributors and retailers with high margins, giving them incentive to promote the product with buyer education and service. Price Maintenance- maintains margins by refusing to deal with distributors or retailers that discount during the innovation stage. A company can allow discounting but ay incentive fees for stocking the product, for co- op advertising, in store displays, premium shelf space and onsite service and demonstration. Also, offer incentives directly to the middlemans salespeople for taking the time to understand and promote the product.
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Pricing New Products in Growth

In the Growth Stage: Pricing concerns changes to costs and benefits of alternative brands
The

innovator and the late entrant assumes competitive positions.

The marketing strategy is decided where it would be placed on the continuum between a pure differentiated product strategy and a pure cost leader-ship strategy.

Pricing with a Differentiated Product Strategy

Focuses on developing unique attributes for its products. E.g. Intel. Can also be focused on a particular buyer segment or at multiple segments. Particular segment uses skim pricing. E.g. GUCCI. Multiple segments uses neutral or penetration pricing E.g. P&G.

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Pricing within a Cost Leadership Strategy.

Focuses on becoming a low cost producer. (Can also be focused on a particular buyer segment or at multiple segments).

Industry-wide cost leadership- penetration pricing is used.but it is NOT the only proper strategy for establishing and exploiting Industry-wide cost leadership.
Neutral pricing can also be used for industry wide and narrow customer focus. 16

Price Reductions in Growth

A reduced price is usually best in this stage

Customers are more price sensitive Lower price speeds adoption & leads to faster market growth Price reduction possible at this stage due to cost economies

Generally no price wars, however there are exceptions due to production volume Should adopt a segmented pricing strategy to cater to segments that naturally emerge at this phase in the products life. Based on
Different knowledge & experience with product Different Value & Cost
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Pricing the Established Product in Maturity

CHARACTERISTICS OF THIS STAGE

Pricing is essential for survival The innovators, early adopters and early majority are joined by the late majority Continued expansion on ones customer base slows down in the face of competition Defending market share is important To avoid sunk costs of investment in Growth stage when operations are at capacity To avoid absolute sales decline Latitude in pricing is limited
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Pricing Latitude

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Pricing Latitude

Latitude if further reduced by factors that increase price competition:

1. Buyers eyes begin to wander
Repeat buyers evaluate competing brands, reducing brand loyalty and the value of a brands reputation

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Pricing Latitude

Latitude if further reduced by factors that increase price competition:

2. Imitation products appear
Imitation of successful products reduces product differentiation and increases competition creating homogeneity

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Pricing Latitude

Latitude if further reduced by factors that increase price competition:

3. Buyers increased price sensitivity
The production of proven standardized product becomes attractive to new competitors. Similar products introduced at cheaper prices become appealing to price sensitive customers.

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How to deal with pricing competition

A marketing strategy that renews industry growth A technological breakthrough Live with the competitive pressure

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Opportunities to improve pricing effectiveness

Unbundling related products and services Improved estimation of prince sensitivity Improved control and use of costs Expansion of the product line Re-evaluation of Distribution channels

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Strategies in the Decline Stage

Strategy depends on the organizations goal:

Exit with minimum losses Survive with competitive positions intact.

3 strategies in the decline stage: Retrenchment: partial or complete capitulation of some market segments to refocus resources. Harvesting: A phased withdrawal from an industry. Consolidation: An attempt to gain a stronger position in the declining industry.
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Conclusion

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