Pricing Over the Product Life Cycle

Adapting Strategy in an Evolving Market

Just like people, products typically pass through predictable life stages: conception, birth, growth, maturity, and eventually, decline. Understanding this process allows managers to prepare strategic plans for long-term success. The profitability of pricing over these life stages reflects the success of such strategic planning. Markets for new products evolve through four distinct phases—development, growth, maturity, and decline. Each phase requires unique pricing strategies to stay relevant and effective.

New Products and the Product Life Cycle

New products initiate the product life cycle, but not all new product launches begin a new life cycle. Innovations requiring market development because of their novelty set the stage for future market behavior and pricing strategies. For instance, while Apple's iPod revolutionized the portable music player market, it still followed the typical lifecycle stages, starting from its launch to growth without quickly entering maturity. When launching new products, especially innovative ones, it's crucial to set prices that neither undercut potential profit by setting them too low nor hinder sales volume by setting them too high. Pricing too low at launch can restrict future pricing capability due to established lower reference prices.

Pricing the Innovation for Market Introduction

Launching an innovative product requires careful strategy, as customers are unfamiliar with the new offerings and need to be educated about their benefits. Pricing strategies during this stage should not focus on penetration (lowering prices to quickly gain market share) due to buyers' low initial price sensitivity. Instead, focusing on "skim pricing" captures maximum revenue from early adopters who perceive high value in the product. Educational efforts in spreading information about the innovation—often through observing others' experiences—are critical, as the diffusion of product information often determines the initial purchasing decisions.

Pricing New Products for Growth

As the product gains acceptance and enters the growth phase, competition generally increases and pricing strategies must shift. Firms can choose between a differentiated product strategy, focusing on unique attributes, or a cost leadership strategy, emphasizing minimal production costs. The choice impacts pricing: differentiated products can command higher prices due to perceived unique value while cost leaders might pursue lower pricing to attract volume and cover lower per-unit costs. Strategic pricing during growth often involves segmenting prices to address different customer needs and value perceptions.

Pricing the Established Product in Maturity

During the maturity phase, when market growth slows, the emphasis shifts to maximizing profitability through optimizing pricing strategies. As products and brands become more comparable and customer knowledge increases, price sensitivity also increases, often leading to more intense price competition. Strategies may include reevaluating distribution channels or expanding the product line with peripheral products or services that offer additional profit margins.

Pricing a Product in Market Decline

The decline phase poses significant challenges as market demand decreases and excess capacity increases. Strategy options include retrenchment (focusing on core markets or products), harvesting (maximizing cash flow while phasing out of the market), and consolidation (acquiring competitors to strengthen market position). Choosing the right strategy depends on the firm's financial state and market position as the market contracts.

Summary

Across all life cycle stages—development, growth, maturity, and decline—pricing strategies must adapt to the changing market conditions. Initially, education and establishing value are paramount, followed by strategic adjustments in response to competition and market saturation. Ultimately, in the decline phase, decisive action and strategic choices determine a firm's ability to exit the market gracefully or consolidate to sustain profitability. Taking a proactive approach to these shifts ensures long-term viability and compliance with evolving consumer and competitive dynamics.