We have mentioned the importance of the product life cycle in deciding on an appropriate pricing strategy and we will now focus more specifically on this issue.
When using this concept as a guide to pricing strategy, it is important to think in terms of the market as a whole rather than just the market position of one business. The definition of the life cycle should be based on the total sales of the product, from its launch by the first mover to its demise.
Four separate phases of the life cycle have been identified and these are important to pricing strategy. They are shown in Figure 2.3.
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Fig. 2.3 The four phases of the life cycle
Some examples of products that are, at the time of writing, in different phases of their life cycle are shown in Table 2.2. A range of different strategies will be appropriate at these four stages of the life cycle.
Table 2.2 Products in different phases of their life cycle
Introduction Flat TV screens
Growth Digital cameras
Maturity CD players
Decline Leaded petrol
Introduction
During the introduction phase the aim is to build sales and customer loyalty for the future. The main priority therefore is to ensure that the product is effectively meeting customers’ needs so that quality is seen as higher than that of current and potential competitors. This creates a foundation on which to build as the market expands. We have seen already that price sensitivity is likely to be low during this early stage.
The pricing level therefore needs to support this strategy and to provide a clear message to consumers. For example, if the new product is positioned as a substitute to an existing one, the message must be either that the new product performs the same function at a lower price – perhaps due to technological innovation – or it offers superior performance.
Sales
Introduction Growth Maturity Decline Time
Generic pricing strategies
However, it would be dangerous to assume that the ‘same function, lower cost’
message will always result in success at this stage of the life cycle. It makes the all too common assumption that competitors will not react. It will succeed only if your price is lower than that which competitors are prepared to charge when faced with such competition. The key to success is to predict the speed and nature of the likely competitor response.
If the message is ‘superior performance’, it will be appropriate to launch at a price premium to existing products. This is because it will be difficult to convince customers that the new product has superior quality if it is being offered at the same or lower price than competitors’. In reality technological innovation or other factors might make this possible, but customers will not normally believe that they can have ‘something for nothing’. The higher price position helps to create their feeling of perceived value.
Growth
In the growth phase of the life cycle the key strategic aim is to achieve a market share position that will deliver high profit levels during the later maturity phase.
It will be much harder to enter the market or gain substantial share during the maturity phase, as this will require gains at the expense of existing competitors – always a difficult task.
During this phase it is less likely that price will be the key driver of buying behaviour because the main focus will be on developing products and services to meet consumer needs. Insight into consumers’ needs becomes more important than price. The successful players will be those whose consumer insight enables them to achieve differentiation and therefore lower price sensitivity. If differentiation cannot be achieved, price will continue to be the dominant factor.
Maturity
During maturity, which normally lasts longer than the previous phases, the focus is on the achievement of maximum profitability and the pricing strategy should support this aim. This is the stage where the hard choices mentioned earlier in the chapter have to be made: management must opt for either a high price/differentiation or a low price penetration strategy and avoid being ‘stuck in the middle’.
During this phase of the life cycle the successful players will increase sales by innovations to meet the needs of new customer groups. Innovation is critical during this phase of the life cycle for a number of reasons. It can continue to prevent existing products from being seen as undifferentiated commodities and thus avoid the resultant greater emphasis on price. Innovation can also extend the total period of the life cycle. Indeed, there are some marketers who believe that
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the theory of the product life cycle is no more than a self-fulfilling prophecy. They believe that marketing managers accept the eventual decline too easily and cut back too much on innovation and marketing spend, thus encouraging its onset.
They point to long-lasting products such as soap or beer where there appears to be no prospect of decline after several hundred years.
Decline
However, in most markets the product does eventually decline. During this phase the strategic aim should be to develop a pricing strategy that will maximize cash flow. There is a danger that a company will over-invest in fixed assets during this period, thus creating capacity that will not be used in the future. This is an easy trap to fall into because the product will be generating high cash flows and the money for investment will be available. The better target for these cash flows is investment in new products in the early stages of their life cycle, thus ensuring the company’s future viability.