How Might Pricing Decisions Be Influenced by Knowledge of the Product Life Cycle?
How might pricing decisions be influenced by knowledge of the Product Life Cycle? Product Life Cycle (PLC) shows the stages of a new product going through in the market place. In general, a product goes through introduction, growth, maturity and decline. The application of the four stages of PLC can assist firms to plan marketing mix decisions. Hence, price setting of a particular product can be influenced by its PLC over the four stages. For mass market with high competition and a new brand of known product, price penetration will be practised at the introduction stage where sales are often low.
It is a pricing strategy that price is set relatively low at the launch of a new product. This is because common products have many substitutes and consumers are sensitive to price change. Thus, low price can discourage competition with the substitutes so that firms can capture large market share quickly and penetrate deeply into the market. It is effective in creating market awareness among similar products. However, price skimming is practised for niche market with low competition and innovative products at the introduction stage.
It is a pricing strategy that price is set at high at the launch of a new unique product. It is to cover expensive R&D costs by making relatively high short-term profits and reflect high quality image. Besides, high profit margin is necessary to compensate low demand. Consumers are not very sensitive to price change and there is less competition in the short term. Thus, the price for an unproved new innovative product is set at high at the introduction stage for as long as it can hold its strong position.
At growth stage where sales are growing rapidly, the previous pricing strategies applied at the introduction stage will still be practised to strengthen the respective objectives. Hence, price penetration will still be practised for common product. Price will continue to be set at low to further expand market share as now product is accepted and well received by the market. For innovative product, market skimming will be practised. Price will continue to be set at high as a signal of high quality. Firms will attempt to build up consumer loyalty before the entry of competitors.
When it comes to maturity stage where maximum sales are achieved, competitors are likely to be entering the market. There will be a need for firms to keep prices at competitive levels. Firms have to consider either match or beat competitors’ prices. For known product which price penetration was previously used, the price now will gradually increase to meet competitors’ prices as consumer loyalty is built and it is recognised by the market. For innovative product which price skimming was previously used, the price now will gradually reduce as competition starts to set in.
Consumers are becoming sensitive to the price change now and a lower price may discourage competition with the substitutes. Firms will aim to retain the market share by capturing sales from weaker rivals. However, there is a risk that a reduction in price might create a perception that the quality is sacrificed. In this case, sales and profits may be adversely affected. Besides, price discrimination can likewise be practised by firms during maturity stage if the market can be segmented. In this case, a product will be sold at different prices to different market segments.
If this occurs, firms will consider the price elasticity of demand for price setting at different market segments to increase total revenue. Thus, products which are price elastic should be charged at lower prices. In contrast, products which are price inelastic should be charged relatively higher. At decline stage where sales are dropping steadily, firms will choose to cut prices. Profit is falling and product at this stage becomes obsolete and in some cases, it may cause harm to a firm’s reputation. Firms will seek to cut expenses to exploit the remaining profits and gain last batch of sales or clear stock to eliminate the product.
Although pricing decisions made based on the PLC of the products may not always bring business a success, there are likely to be common links between the phases of the PLC and the nature of the price, product, promotion and place decisions taken by the firm. Somehow, PLC is only a model and the managers should not follow exactly the standard life cycle for every product. Therefore, the pricing decisions will also depend on competitors’ actions, the state of the economy and the marketing objectives of the business.