Product Life Cycle Based Pricing

Companies must adapt to the stages of the product life cycle to effectively sell and promote their products. Depending on the product life cycle stage, a company will develop branding techniques and an appropriate pricing model. Understanding each stage helps businesses increase profits.

The stages of a product life cycle govern how a product is priced, distributed, and promoted. A new product goes through multiple stages during the course of its life cycle, including an introduction stage, growth stage, maturity stage, and decline stage. As a product ages, companies look for new ways to brand it, and also explore pricing changes. Market and competitor research help businesses assess the proper course of action to maintain product profitability.

Introduction Stage

A new product may simply be either another brand name added to the existing ones or an altogether new product. Pricing a new brand for which there are many substitutes available in the market is not a big problem as pricing a new product for which close substitutes are not available.

1. Skimming Price Policy: Selling a product at a high price, sacrificing high sales to gain a high profit, therefore ‘skimming’ the market. Usually employed to reimburse the cost of investment of the original research into the product – commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price.

2. Penetration Price Policy: This pricing policy is adopted generally in the case of a new product for which substitutes are available. This policy requires fixing a lower initial price designed to penetrate the market as quickly as possible.

Growth Stage

During the growth stage, a company aims to develop brand recognition and increase their customer base. The quality of their product is often improved based on early reviews, and technical support is usually enhanced. Pricing remains generally stable as demand continues with minimal competition. A larger distribution network is formed to keep up with the pace of demand.

Maturity Stage

In the maturity stage, the steady sales start to decline and companies face greater challenges in the marketplace. Competitors will often introduce rival products with the intent of grabbing some of the market share. This is the product life cycle stage in which the customer base is heavily fought over and price decreases most often occur. Additional features are added to distinguish a product from its competitors. Companies run promotions during this stage that highlight the primary differences between their product and their competitors’ products.

Decline Stage

In the decline stage, a company will make important decisions regarding the future of their product. They can choose to create new iterations of the product with new features, or they can reduce the price and offer it at a discount. A company may choose to discontinue the product altogether, either disposing of their inventory or selling it to another company who is willing to manufacture and market it. Promotion at this stage will depend on whether a company chooses to continue its product and how they plan to re-market it.