How Does A Firm S Pricing Policy

Relate To The Product S Life Cycle Essay, Research Paper

How does a firm s pricing policy relate to the product s life cycle?

When a company launches a new product, it knows the product won t last forever. However, the company does expect to earn a satisfactory profit to cover all the effort and risk that went into launching it. A firm can never accurately predict the lifetime of a product, but the lifetime involves four distinct stages. These four stages are collectively known as the Product Life Cycle (PLC).

The first stage is the introduction stage, when the product is first launched. Sales growth tend to be low as consumers are introduced to the existence of the product. At this stage therefore, profits are negative or low because of the low sales and high distribution and promotion expenses. Much money is needed to attract distributors and build their inventories. Promotion spending is especially high to inform customers of the new product and get them to try it.

One of the biggest launches in recent history is that of the DVD player. Not only is this a new product, it s a whole new market. Industry executives have named DVD-Video the “Medium of the Millennium” and boast that DVD-Video is the fastest growing new packaged media format launch in history with close to 5.4 million DVD-Video players shipped to retail since the format launched nationally in the U.S. in autumn 1997 (Consumer Electronics Association).

The outlook for next year is equally promising. The DVD Entertainment Group estimates that hardware shipments will double to eight million DVD-Video players in 2000. And, based on the success of the format exceeding all previous forecasts that number could be even higher. The group also estimates that the installed base will more than exceed 10 percent of US households, a benchmark of success for a consumer electronics product.

The surge in hardware sales is a positive boost for retailers. In 1999, DVD-Video hardware represented more than $1 billion in retail sales. This includes stand-alone players only and does not include DVD-ROM drives or other home theater products.

There are now nearly 70 DVD Video player models marketed under 30 different consumer electronics brands.

In only its third year in the marketplace, DVD-Video player prices have declined significantly. According to Intelect ASW, the average price sold for a DVD-Video player was $298 in November, down 30 percent from $428 at the same time last year. Some players and models are available for less than $200 making the format accessible to the mass market.

http://www.dvdinformation.com/news/index.html

If the product manages to survive the first stage, the next stage sees the product s sales starting to climb quickly. Steadily, the product s reputation should increase, most notably by word-of-mouth.

A knock-on effect of this product s stage is that new competitors (who are attracted by the opportunities for profit) will enter the market. They will introduce new product features thus the market expands. The increase in competitors results in the number of distribution outlets, and sales jump to build reseller inventories. Prices remain constant or perhaps decrease slightly, whilst promotion spending might increase slightly.

Profits increase during the growth stage, as the promotion costs are spread over a large volume and as unit-manufacturing costs fall. There are several strategic ways a firm uses to sustain rapid market growth as long as possible. It improves product quality and adds new product features and models. It enters new market segments and new distribution channels, and prices are reduced to attract more buyers.

The growth stage sees the firm facing a trade-off between high market share and high current profit; by investing on product improvement, promotion, and distribution, the firm can dominate the market. In doing so however, it sacrifices maximum current profit, which the firm hopes will be reimbursed in the next stage.

It s viewed that Cadbury s Timeout chocolate bar is in a period of growth. It launched successfully and is now in direct competition with well-established brands such as Twix and Mars. The price of a Time Out bar has stayed constant since its launch. Unlike the DVD player, the Time out did not start out in the introduction stage with a high price as it s hardly as novel as the DVD player. When Time Out was launched, it had many similar competitors, so instead of a high price, Cadbury s monitored the price and instead concentrated on a heavy promotion campaign.

The sales growth of the product will eventually slow down, thus the product has phased into the maturity stage. The decline of sales growth results with many producers trying to sell many products. This over-capacity leads to greater competition: competitors start to decrease the prices, increase the advertising/sales promotion and enlarge their R & D budgets to modernise the product. All this results in smaller profits, which means that weaker competitors eventually drop out, which leaves the industry with only well-established competitors.

It is during the maturity stage that a firm should consider modifying three elements: the market, product and marketing mix.

Modifying the market involves the firm trying to increase the consumption of the current product, by looking for new users and market segments. A successful example of this when Johnson & Johnson targeted the adult market with its baby powder and shampoo

The company could try modifying the product- by changing characteristics such as quality, features or style to attract new users and to instigate more usage. The firm might also improve the product s quality and performance i.e. its durability, reliability, speed, taste. Additional features concerning the product s usefulness, safety or convenience can be applied, as Sony keep doing to its Walkman and Discman ranges, and Volvo have developed a reputation for safety.

A firm can also modify its marketing mix- improving sales by changing one or more marketing-mix elements.

At a certain point in time of the product s history, the product will experience declining sales; hence the next stage being termed the decline stage. The decline could occur for a number of reasons, including technological advances, shifts in consumer tastes, and increased competition. As sales and profits decline, some firms withdraw from the market. The remainder may drop smaller market segments, or cut the promotion budget and further reduce the product s price.

A product in the decline stage may prove costly to the firm in a number of ways. The product s failing reputation could reflect on the firm in the long term, and keeping a weak product delays the search for replacements and damages current profits.