Pricing problems
- 2. Specific Problems of Pricing are: • Pricing Over the Life Cycle of the Product • The Rate of Market Growth: • The Significance of Cost • Post-Skimming Strategies • Mixed Strategies • Pricing in Maturity • Pricing Products in Decline
- 3. 1.Pricing Over the Life Cycle of the Product • Every product has its own life cycle and its sales and profitability change over time. • The product life cycle hypothesis was developed in an attempt to recognize formally distinct stages in the sales history of representative products. • As the product passes through each of these stages, the strategies and problems of pricing must be varied accordingly
- 4. 1 • There are four phases of a product’s life cycle: introduction, growth, maturity and decline. Sales and profit patterns vary during these stages.
- 5. • In the product launching (introductory) phase, the manager in charge of pricing has to decide whether to adopt a market penetration or a price skimming strategy and, in the growth phase, management can probably be more aggressive in pricing to improve profits. • However, as a general rule, the maturity and decline stages are characterised by vigorous competition.
- 7. 2.The rate of Market growth: • In practice, some products are inherently less likely to gain rapid market than others. • These products are, therefore, unsuitable for a penetration price policy, involving initially low, and perhaps even negative, margins.
- 8. 3. The significance of cost: • The third major factor is the cost structure of the producers. A reduction in average cost is likely if there is learning effect. • In general “the greater the scale factor and the learning effect, the more appropriate will a penetration policy be.”
- 9. • In Figure, AC1 shows the unit cost of producing various quantity of a product within a period, say a day.
- 10. 4.Post Skimming Strategies: • Choice of a skimming price is not enough. • Subsequent decisions will have to be made about the timing and size of future reductions from the initial price. • In some instances, the producer’s hand may be tied by the actions of competitors.
- 11. • If it is felt that the ‘top’ of the market has be- come saturated it becomes appropriate to lower the price in order to attract new customers. • A substantial price reduction may lead to loss of prestige. A series of small price reductions would be more appropriate.
- 12. • Summarize the risks of the proposed project and how they will be addressed. • Estimate expected rewards, particularly if you are seeking funding.
- 13. 5.Mixed Strategies: • Many firms do adopt a strategy which falls be- tween the two extremes of the skimming and penetration prices. • This policy is followed by many large companies in case of many new products. For example: Du Pont followed a mixed strategy for both nylon and cellophane.
- 14. 6.Pricing in Maturity: • Maturity is generally defined in terms of the product’s rate of sales. • It is the stage between the growth period, when sales increases rapidly and the period of decline, when sales falls sharply. The concept of product life cycle is useful for multi-product firms.
- 15. • It prevents complacency on the part of firms who have introduced successful products, alerting them to the need to have additional products ready for launching when sales of their existing products begin to fall.
- 16. 7.Pricing Products In Decline: • three additional strategies bear relevance at the decline stage: 1. Product Reformulation Strategy 2. Price Reduction Strategy 3. Withdrawal of Advertisement Support Strategy