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Product Lifecycle
In each of the phases of product life cycle (PLC), the market has a unique personality; cost structures change, buyer’s price sensitivity changes, the nature of competition changes as does the product itself. Accordingly, one’s pricing strategy must vary if it is to remain appropriate. We will examine in this section what would be the appropriate pricing strategies at each stage of the life cycle.
Pricing the product at the introduction stage
A production innovation requires substantial market education before it finds a place in the buyers lifestyle or business practice. Marketers will encounter buyer apathy; skepticism and inertia despite the fact the product have a legimate value. The diffusion of information also goes through a certain process and recognition of this process is vital.
Buyers are completely ignorant about the product; until they learn about the product benefits they may not even recognize the need for it. Hence the firms’ primary goal is to educate the buyer about the “worth” or value of the product and the pricing strategy has a key role to play in this buyer education strategy.
At this stage, since buyers are ignorant about the product, they are price insensitive towards the innovation. The important thing to remember is that this same price insensitivity bears no relation to the long run price sensitivity of the buyer. Prospective buyers tend to use price as an indicator of quality and value. Because there are no alternative brands, they lack a reference price for determining value and to evaluate what would constitute a fair or bargain price; although prices of close substitutes may be used as reference prices.
Given the buyers ignorance, the firm’s primary goal is to educate the buyers about the products utility and set a list price that would establish the worth of the product. It is the price that the satisfied buyer would establish the worth of the product. It is the price that the satisfied buyer would be willing to pay for a repeat purchase. It gives the buyer a reference from which to estimate the product’s worth.
Typically the most preferred pricing strategy at this stage is the price skimming strategy; the list price would be near the value that the price insensitive buyer will place on the product. A market penetration pricing strategy is not recommended at this stage, since the low price insensitivity of the buyer will make the strategy ineffective and may due to price quality effect damage the products reputation. The only conditions under which a market penetration pricing strategy may work, is if the product is not truly innovative and is merely an upgrade version of an existing product or if there exists a large proven market is merely an upgrade version of an existing product or if there exists a large proven market for the product. Even under such circumstances, companies generally set neutral pricing strategy, where the price would be near the relative value that the more typical user would have for the product.
One of the ways of educating buyers about the utility and worth of the product is to use price induced sampling. Skype internet calling software, which allows calls to be made over the internet, is currently disturbing its software free over the internet. The strategy is to distribute a very basic version of the software free to customers; once the customers get accustomed to the product and begin to see the benefits, the strategy is to offer the advanced versions at the price, at which point customers would begin to see the value and would therefore be willing to pay for more advanced versions. Worldspace Satellite Radio when it was first launched in India gave free subscriptions to all Worldspace users.
The more preferred strategy is to keep the margins at normal levels, but pay incentive fees for stocking new products, co-op advertising, in-store displays, premium shelf space and for onsite service and demonstration.
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Pricing the product at the introduction stage
A production innovation requires substantial market education before it finds a place in the buyers lifestyle or business practice. Marketers will encounter buyer apathy; skepticism and inertia despite the fact the product have a legimate value. The diffusion of information also goes through a certain process and recognition of this process is vital.
Buyers are completely ignorant about the product; until they learn about the product benefits they may not even recognize the need for it. Hence the firms’ primary goal is to educate the buyer about the “worth” or value of the product and the pricing strategy has a key role to play in this buyer education strategy.
At this stage, since buyers are ignorant about the product, they are price insensitive towards the innovation. The important thing to remember is that this same price insensitivity bears no relation to the long run price sensitivity of the buyer. Prospective buyers tend to use price as an indicator of quality and value. Because there are no alternative brands, they lack a reference price for determining value and to evaluate what would constitute a fair or bargain price; although prices of close substitutes may be used as reference prices.
Given the buyers ignorance, the firm’s primary goal is to educate the buyers about the products utility and set a list price that would establish the worth of the product. It is the price that the satisfied buyer would establish the worth of the product. It is the price that the satisfied buyer would be willing to pay for a repeat purchase. It gives the buyer a reference from which to estimate the product’s worth.
Typically the most preferred pricing strategy at this stage is the price skimming strategy; the list price would be near the value that the price insensitive buyer will place on the product. A market penetration pricing strategy is not recommended at this stage, since the low price insensitivity of the buyer will make the strategy ineffective and may due to price quality effect damage the products reputation. The only conditions under which a market penetration pricing strategy may work, is if the product is not truly innovative and is merely an upgrade version of an existing product or if there exists a large proven market is merely an upgrade version of an existing product or if there exists a large proven market for the product. Even under such circumstances, companies generally set neutral pricing strategy, where the price would be near the relative value that the more typical user would have for the product.
One of the ways of educating buyers about the utility and worth of the product is to use price induced sampling. Skype internet calling software, which allows calls to be made over the internet, is currently disturbing its software free over the internet. The strategy is to distribute a very basic version of the software free to customers; once the customers get accustomed to the product and begin to see the benefits, the strategy is to offer the advanced versions at the price, at which point customers would begin to see the value and would therefore be willing to pay for more advanced versions. Worldspace Satellite Radio when it was first launched in India gave free subscriptions to all Worldspace users.
The more preferred strategy is to keep the margins at normal levels, but pay incentive fees for stocking new products, co-op advertising, in-store displays, premium shelf space and for onsite service and demonstration.
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