What kind of pricing strategy is adopted over the life cycle of a product. what do you think will be an appropriate price policy when the demand reaches its saturation and substitute product is likely to enter the market?

solution:

Pricing over Life-Cycle of a Product:

• Product life cycle management (or PLCM) is the succession of strategies used by business management as a product goes through its life cycle.

The life cycle of a product is generally divided into four stages:

(i) Introduction stage

(ii) Growth stage

(iii) Maturity stage

(iv) Decline stage

• The diagram presents the four stages of a product's life cycle through a curve showing the behavior of the total sales over the life cycle.

• The the introduction phase is the period taken to introduce the product to the market. The total sale during this period is limited to the quantity put on the market for trial with considerable advertisement.

• The sales during this period remain almost constant. Growth is the stage, after a successful trial, during which the product gains popularity among the consumers and sales increase at an increasing rate as a result of the cumulative effect of advertisement over the initial stage.

• Maturity is the stage in which sales continue to increase but at a lower rate and the total sale eventually becomes constant.

• After the maturity stage, comes the stage of decline in which total sales register a declining trend for such reasons as (i) an increase in the availability of substitutes, and (ii) the loss of distinctiveness of the product.

• The pricing strategy varies from stage to stage over the life-cycle of a product depending on the market conditions.

• From the pricing strategy point of view, growth and maturity stages may be treated likewise.

• We have first discussed the pricing of a product in its initial stage as the pricing of a new product and then in the 'maturity' and 'decline' stage.

(i) Introduction stage:

• Generally high, assuming a skim pricing strategy for a high-profit margin as the early adopters buy the product and the firm seeks to recoup development costs quickly.

• In some cases, a penetration pricing strategy is used and introductory prices are set low to gain market share rapidly.

(ii) Growth stage:

• During the growth phase, you’re no longer a newcomer in the market. Customers now have a good understanding of what value your product will offer them, and there is high demand and lots of sales.

• It is at this stage that businesses aim to generate enough revenue to recoup their initial investments and costly marketing expenses of the early days. So, products are priced higher.

• While the growth phase might be profitable, it is also that phase where competitors start showing up and offering similar products in the market. To put a further dent in your customer base, rival companies might even provide the same value as you and at a much lower price.

• The strategy some companies employ at this point is to either lower their prices or increase their product’s value. By adding more features to their product and doubling marketing efforts, some businesses have successfully maintained their value-based pricing.

• Also, to increase revenue at this stage despite the presence of aggressive competitors, some companies extend their niche and market to new customers.

(iii) Maturity Stage:

• The maturity stage is the most profitable. While sales continue to increase in this stage, they do so at a slower pace. Because brand awareness is strong, advertising expenditures will be reduced.

• Competition may result in decreased market share and/or prices. The competing products may be very similar at this point, increasing the difficulty of differentiating the product.

• The firm places effort into encouraging competitors’ customers to switch, increasing usage per customer, and converting non-users into customers.

• Sales promotions may be offered to encourage retailers to give the product more shelf space over competing products. During the maturity stage, the primary goal is to maintain market share and extend the product life cycle.

(iv) Decline Stage:

• Eventually, sales begin to decline as the market becomes saturated, the product becomes technologically obsolete, or customer tastes change.

• If the product has developed brand loyalty, the profitability may be maintained longer. Unit costs may increase with the declining production volumes and eventually, no more profit can be made.

• Surprisingly, during the decline, some companies have been able to recycle a product back into the maturity stage by adding newer features and increasing targeted marketing.