Transcript chapter seventeen - University of Colorado Boulder

Lecture 14 Product Lifecycle Pricing,
Pricing of New Products, and Pricing in
Economic Downturns
1
Market
penetration grows

Market penetration
stabilizes
Market penetration
declines
How do we price along product life cycle?
Sales and
Profits ($)
Sales force
training, sales
support materials,
advertising
Sales
Profits
Product Introduction
Development
Stage
Losses/
Investments ($)
Growth
Maturity
Time
Decline
Sales and Profits Over
the Product’s Life From
Inception to Demise
INTRODUCTION
GROWTH
MATURITY
DECLINE
CUSTOMERS
Small customer base
Innovators
Little product knowledge
Low knowledge buyers
Growing customer base
Early adopters
Little product knowledge
Moderate knowledge
buyers
Increasing brand loyalty
Large customer base
Late adopters/Laggards
Segments and niches
High knowledge buyers
Repeat purchasers
Comparison shopping
Declining customer base
High knowledge buyers
Familiar with all suppliers
and options
COMPETITION
Few competitors
Low threat of competitive
rivalry
Gains from market
development are high
Increased competitive
entry
Brand proliferation and
confusion
Differentiation vs. Cost
leadership
Shakeout to stable group
of competitors
Evoked set of dominant
brands (Homogeneity)
Market share defense
Gain from competitors
Increased price competition
to fill capacity
Exiting of weak
competitors
COSTS
High incremental costs or
production and promotion
Low contribution margin
External sourcing
Declining unit variable
costs through volume;
Increasing contribution
margins
Low variable costs
High contribution margins
Cost controls
Asset utilization
Excess capacity
High average costs, due to
low capacity utilization
PRICE SENSITIVITY Reference value effect
Price quality effect
Difficult comparison effect
Fairness effect
LOW SENSITIVITY
Reference value effect
Price quality effect
Difficult comparison effect
Switching cost effect
Expenditure effect
End benefit effect
MORE SENSITIVITY
Switching cost effect
Expenditure effect
End benefit effect
Lower risk
HIGH SENSITIVITY
MARKETING
OBJECTIVES
Generate primary demand
Customer awareness
Market education
Buyer frames of reference
Information diffusion
Brand positioning
Differentiation
Brand loyalty
Defensible competitive
position
Market share defense
Marketing and production
efficiency
Profitable market
segmentation
Retrench, & defend
strongest product lines
Harvest the business
Consolidation to more
reasonable # of
competitors
PRICING
STRATEGIES
Establish value and worth
Bundled pricing, to simplify
Segmented pricing
according to buyer
knowledge (Hi-Mod-Lo)
Expansion of product line
and price points
Multiple pricing channels of
distribution
Multiple segmentation
pricing
Price to maintain margins,
but signal intent to defend
Pricing for maximum cash
flow
Predatory pricing
HIGH SENSITIVITY
Pricing new product
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Price according to EVC (see lecture on EVC)
Use promotion to induce purchase (see lecture on price promotion)
Adopt skimming pricing with discounts to encourage trials
Sometimes, it is optimal to start with penetration pricing if current
sales increase future sales. Conditions 51680 Price of Lexus
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“network effect”
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Nintendo
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Intuit introduced Quicken at $0
image
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1989 Toyota introduce Lexus
35000
1989
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cross-sell
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Computer Associates offer free Simple-Money
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Universities get attractive deals on hardware and software
1995
How current price affects future price?
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Customer
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Cost
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Price low to generate future sales
Price and promotion affect consumer perception
Pricing to get economy of scale
Experience Curve Pricing
Competition
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Current price affects competitors’ capacity planning
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price of tire dropped 25% in 1980s as capacity utilization slipped to 76%
price of memory chips dropped from $38 to $8.50
Federated Industries
Current price affects competitors’ entry decision
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International Pen Corporation high margin invited 100 competitors
Federated Industries
Today’s pricing decision inevitably affect how tomorrow’s cost,
customer and competition and hence pricing decision will be
made