pricing strategies at different stages of product life cycle

Introduction Just like people, most products go through several distinct phases during their lifetime. Once products are introduced, they'll go through periods of growth, maturity and eventual decline. That's referred to as the product life cycle, and understanding how it works can guide you in setting the price of your products and in tweaking your business strategy

Product life cycle

Looking at the cycle The gestation period for a new product is usually referred to as the development stage. That's when the original idea is transformed into prototypes, tested, and sometimes given to small groups of users for evaluation and feedback. You don't have a marketable product yet at that stage, so it doesn't directly play into your pricing strategy. The next step is the introduction phase, where your product is rolled out to the market to sink or swim.

Looking at the cycle If it finds willing buyers, you'll move on to the next phase in the product life cycle, which is growth. That's the exciting time when your product is gaining traction, and you're breaking into new markets and demographics. Eventually, your growth will plateau, as the market for your product becomes saturated, and your sales come more from replacement purchases than from new purchases. That's called the maturity stage. Finally, comes decline, the period in which your product is being edged out of its market by newer or - maybe - better products. Your pricing strategy should recognize, and take advantage of, your product's place in its life cycle.

The introductory phase There are two ways you can go with pricing, when you first introduce your product. If it's a big advance over the older products in your niche or if it does something entirely new or represents a new technology, you may be able to demand a premium price for your product in its early days. That helps you recover your R&D costs in a hurry, and early adopters are often not price-sensitive, if your product meets a real need. On the other hand, if your product is so different that people need to try it to really grasp its potential, you might need to offer it at a reduced introductory price, just to attract attention and generate some word of mouth. You might even need to give away free samples, to let the potential customer recognize the quality, taste etc. of your product when you do introduced it.

The growth phase During the growth phase, you'll be able to ramp up production, which helps bring down your cost per unit. If you're able to reduce your selling price while keeping your profit margins healthy, you'll be in a position to profit happily from your product's popularity. One way to maximize your revenues is by plowing some of those profits into opening new markets and distribution channels, so that you can capitalize on your product while it's at its hottest. At this point, you'll have paid down much of the product's R&D cost, so it's time to start funneling a few dollars into your next product, and for improvements on your current one.

The maturity phase Eventually, any product reaches a point of stability, where your markets are fully penetrated, and growth gradually slows to a relative standstill. Even if your product originally was a ground-breaking product, you probably now have competitors who offer something similar. This is the stage in which you stand to make the most money from your product, because you'll already have plenty of awareness in the marketplace, and your R&D costs are long-since paid off. As long as you can find ways to differentiate yourself from your competitors, your product can continue to be a cash cow. Even in a scenario in which cost-cutting rivals force you to reduce your prices, you should have plenty of room to make money.

The decline phase It's simple folk wisdom that "all good things must come to an end," and that's the case for most products, as well. Over time, new products or new technologies come along, and sales of your product will begin to ebb. At this stage, you'll probably have worked out all the kinks in your manufacturing process, and your costs now are as low as they'll ever be, so you have the option of lowering prices to keep the product as attractive as possible. Ideally, you'll also have new products at various stages of their own life cycles, so the drop in demand for one won't create a crisis for your business.

Knowing where you are You'll know when your product is in its introductory and growth phases, because it's still relatively new, and your sales figures will tell you the whole story. The real trick is knowing when your product slides from maturity into decline, and then taking the appropriate steps to maximize your profit from it. If you're feeling the effects of a larger drop in the economy, for example, your product might not be in decline yet. Waiting out that business cycle, or throwing additional money into marketing, in an effort to crowd out competitors in your customers' eyes, can help prolong the life of your product. Giving up on it too soon, and reducing your manufacturing or marketing efforts, can become a self-fulfilling cycle.

Postponing decline Most products rise and fall, but a few manage to remain solid sellers year after year, despite the maturity of their markets. Coca-Cola has been at the mature stage of its life cycle for a century or so, and it continues to lead in its market segment. That's unusual, and most companies need to put in a bit more effort just to stay in the game. The usual strategy is to find ways to refresh your product, through new features or added abilities. Just think: How many times has your favorite tooth paste has been "new and improved" in your lifetime? If you can find enough ways to keep your product competitive with its peers, then, sometimes, you can prolong that profitable maturity stage for a very long time.