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What is cycle pricing?
Each product has its life cycle. In such a case, life cycle pricing is the pricing strategy directed at determining the price of a product based on each presented stage a product completed. There is a gestation period for a new product referred to as the development stage in such a case. It is when the original idea of a product is transformed into prototypes. They are further tested and presented as a new product. One can set the benchmark for further pricing strategy during the development stage.
The product life cycle is delivered in different phases and suggests how the initial vision of a new product meets the criteria of a final version of a product. How a product was perceived during the initial stages and how it played out, in the end, determines the functionality of a product’s life cycle in general.
Within the further stage of cycle pricing, there is an introductory phase. It is when a new product is presented to the market to determine whether it will succeed or fail. If a new product finds potential buyers, which correlates to a high degree of willingness to pay, the product life cycle will move on to the next stages. During the introductory phase, the product is getting traction. New markets are entered, and new demographics are appealed to. However, one should understand that eventually, the interest in the product will plateau. Finally, there comes the decline. It is the period in which a product is being edged out of the market, namely because new developments within their introductory phase enter the market.
Product life cycle pricing strategies
Product life cycle pricing strategies are represented through four key aspects. Exploring them allows for valuable insights into setting the price for a new product within its life cycle stages.
Setting the initial price.
There are two primary ways a business can engage in pricing when a company first introduces a product. One can introduce a big advance to an old product. Besides, a company can put forward an entirely new product, one with revolutionary technology. There is a foundation to set a premium price for a product in its early stages or days in both cases. At this point, the initial price can be high. The approach ensures that a business compensates for R&D costs and other expenses.
From a different point of view, setting the initial price strategy in life cycle pricing can lead to confusion among consumers. For instance, if your product is so different that people cannot grasp its value from the get-go, it is wise to set a reduced price to attract clients and boost demand. These two approaches are applicable at the initial stages of a product’s life cycle.
Establishing product’s growth
After a new product is introduced and all the relevant data gathered, it is time to decide whether a business needs to ramp up production. If there is a sufficient foundation for boosting production, a company can cut its prices per unit. Keeping profit margins healthy while also reducing the selling price means adequate demand and people are happy with the product.
At this stage, the product's life cycle strategy includes reaping the benefits of the previous stage. The best chance to prepare the business for a growth stage is to invest in the introductory phase.
Exploring the maturity stage
The maturity stage offers distinct possibilities for life cycle pricing. When a product reaches a point of stability, it is time to speak about maturity-based strategies. At this point, companies need to understand the dynamics of a product's life cycle. Even if a product was ground-breaking, during the maturity phase, there are likely to be similar products offered by competitors.
Respectively, during the maturity phase, the strategies should revolve around making everything possible to differentiate the product from its competitors. At this point, a reduction in prices might be viewed as a good and viable option.
Dealing with a product’s decline
The final stage of the product's life cycle offers particular insights into cycling pricing. All products, at some point, reach the end of their life cycle. Probably, during the decline stage, a business has done everything possible to differentiate the product. Yet, the option of keeping prices low is still viable during this stage. Respectively, the phase and cycling pricing correlate in that it pushes a company to do everything possible to extend the “death” of the product as long as possible.
Special considerations of life cycle pricing
It is important to explore various special considerations when understanding the different stages of a product's life cycle and its correlation to pricing strategies. There are price cycle-sensitive markets in which companies can create incentives for raising prices even in the later stages of a product's life cycle. For instance, when it comes to gasoline as a product. Regardless of the phase of this product’s life cycle, there will still be demand, and the price might even grow during maturity.
Keeping that in mind, it is crucial to consider various external factors when engaging in cycle pricing. It is not always about the industry or market. Often, it is about the product itself.
All in all
Life cycle pricing directly correlates to the product’s life cycle. Depending on the product’s life stages, different pricings approaches can be applied. Yet, the experience shows that the introductory phase is the most important aspect to consider. If you want to get the most profits from a product, try to invest as much as possible into the introductory stage.
Find answers to some of the most common questions people have regarding the use of Competera.
What is product lifecycle pricing?
Lifecycle pricing is the pricing strategy directed at determining the price of a product based on its specific role in the portfolio.
What are the roles or stages of the product life cycle?
The typical product roles include new entries, traffic-generators, revenue-generators, Key Value Items (KVI), Long tail products, Best Price Guarantee (BPG) products, and others.