A Product’s Life Cycle (PLC) can be divided into several stages characterized by the revenue generated by the product.
The life cycle concept may apply to a brand or to a category of product. Its duration may be as short as a few months for a fad item or a century or more for product categories such as the gasoline-powered automobile.
Product development is the incubation stage of the product life cycle. There are no sales and the firm prepares to introduce the product. As the product progresses through its life cycle, changes in the marketing mix usually are required in order to adjust to the evolving challenges and opportunities.
Introduction Stage:
When the product is introduced, sales will be low until customers become aware of the product and its benefits. Some firms may announce their product before it is introduced, but such announcements also alert competitors and remove the element of surprise.
Advertising costs typically are high during this stage in order to rapidly increase customer awareness of the product and to target the early adopters.
During the introductory stage the firm is likely to incur additional costs associated with the initial distribution of the product. These higher costs coupled with a low sales volume usually make the introduction stage a period of negative profits. During the introduction stage, the primary goal is to establish a market and build primary demand for the product class.
Price under 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.
Growth Stage:
The growth stage is a period of rapid revenue growth. Sales increase as more customers become aware of the product and its benefits and additional market segments are targeted. Once the product has been proven a success and customers begin asking for it, sales will increase further as more retailers become interested in carrying it.
The marketing team may expand the distribution at this point. When competitors enter the market, often during the later part of the growth stage, there may be price competition and/or increased promotional costs in order to convince consumers that the firm’s product is better than that of the competition. During the growth stage, the goal is to gain consumer preference and increase sales.
Maturity Stage:
The maturity stage is the most profitable stage. 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.
Possible price reductions in response to competition while avoiding a price war.
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.
Prices may be lowered to liquidate inventory of discontinued products. Prices may be maintained for continued products serving a niche market.
Product Line Pricing (PLP):
Product line pricing is a pricing strategy that uses one product with various class distinctions. An example would be a car model that has various model types that change with performance and quality. This pricing process is evaluated through consumer value perception, production costs of upgrades, and other cost and demand factors.
Product line pricing is used when a primary product is offered with different features or benefits, essentially creating multiple “different” products or services.
For Example – A car could be the primary product. It could come standard, with a sunroof and navigation system or fully stocked with all the features and add on. Each product would then be priced accordingly.
The goal of product line pricing is to maximize profits. The more features offered, the more consumers will pay. The goal is to draw enough interest in the primary product that the upgraded product will be sold (at a greater price) based on the interest in the “basic” primary product. By using PLP, some individual products may not make profits, but the goal is for the product line as a whole to turn a profit.
Product line pricing is seen from gas pumps to car dealerships and from ice cream shops to fast food restaurants. A basic car wash may be shown as one price, a super wash with wash and wax will cost a little more, and a full-service premium wash will be the most expensive.
Price Leadership:
Price leadership is the situation in which a market leader sets the price of a product or service, and competitors feel compelled to match that price. A company has price leadership when it sets the price of products in its industry and other companies, often much smaller than the leader, all follow suits.
This usually happens when the products are not highly differentiated and there is enough demand for each of the competitors to remain profitable after the price change.
Price leadership is regarded as imperfect collusion among the oligopolistic firms, where all firms follow the lead of one firm. The firm which takes the initiative of setting the price and announcing changes in price from time to time is called as price leader. He fixes the price by implicit understanding rather than formal agreement.
The price leader is generally a leader in all the markets for long periods. He can maintain his leadership by pursuing a definite and a consistent price policy, i.e., by using his power with restraint. The leader should change the price, when he feels that the change in cost and demand conditions are permanent to maintain followers’ loyalty, i.e., when the market is ready for the change.
Other firms in the industry, which match the leader’s price and variation over time, are called as price followers. Price leadership is more common in natural and stable markets, where highly standard products like steel, oil, cement, are produced. However, price leadership can prevail under both pure as well as differentiated oligopoly.
Price leadership may be dominant or barometric. Under dominant price leadership, the leader firm is large and powerful enough to fix a price, which all other firms will be forced to follow. Each follower firm takes this market price as given and produces the output at which marginal cost equals marginal revenue.
Here, the dominant firm acts as a monopolist, who maximizes profit by taking the supply curve of the followers as given. While the followers offer products at competitive prices, dampening the control of dominant firm over the market price. The leader gets only the residual share of the market. If the market share of the followers goes up, the monopoly power of the leader suffers.
Therefore, in this version, the equilibrium price is lower than what would be obtained by a pure monopolist. The dominant firm can maintain its dominance in the market by innovating on ‘non-price competitive areas’, i.e., new brands, product improvements, promotion, distribution, dealer concessions, free gifts, easier credit terms, free home delivery, after sales services, longer period of guarantee, etc. or by keeping the market price low enough to deter entry.
When this leader firm sets a very low price, it may force some of the firms to leave the industry. On the other hand, under barometric price leadership, leader firm is regarded as a wise firm, which sets the price reflecting the market forces and the needs of the other firms in the industry. Any alternation in price cannot be done by a barometric firm in an arbitrary fashion, as the dominant price leader can do.
It is clear from the two types of price leadership explained above that price leadership arises through cost or productive capacity advantage. Low cost firm can withstand the losses of a price war and grab leadership through lower price. Such firm can increase market share by snatching large and profitable markets from conservative rivals.
It is presumed to have the greatest stake in the welfare of the industry the greatest power to enforce followership, the greatest capability of demand forecasting, the best informed about market demand supply conditions so as to determine the price policy of the entire industry. Besides this, long-term profit history, sound management and product innovation by a firm may also lead to price leadership.