There are many things to consider when setting your product price, we have covered many of them elsewhere on the site, but one useful tool can be to use the product lifecycle to inform pricing strategy.
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The product lifecycle is a marketing model that tracks the stages of a product from launch to decline in terms of market penetration. While the duration of the lifecycle will vary in different industries, the basic principle widely applies.
The model begins with product development, then introduction to the market, growth, maturity and, ultimately, decline. A product in a very fast-moving industry, such as high fashion, may move through the cycle in just a few weeks. A product that doesn’t change significantly over time and continues to supply a need, such as a kitchen utensil, may last many years. The trigger for decline is usually the development of new technology or innovation.
The introduction phase of your product is an important period in setting your price. For many industries, this is your opportunity to charge a premium price. This allows you to do several things: recoup some development and launch costs, pitch your product as a premium product, and create some market attractiveness around its newness and unique selling points. This is known as skimming or creaming. You can only do it until a new product or newer technology comes along, at which point (when you will move into the maturity phase) your price should plateau and then drop.
This is very common in technology. Consider how expensive new phones or computer technology is when it first launches on the market and how it becomes cheaper when newer models are launched.
If you decide not to skim but instead compete on price to try to achieve faster market penetration, be aware that this will impact on profit margins and, while it is easy to initially price high and then lower your price, it is very difficult to start low and then increase it. Few markets will tolerate that.
Monitor closely where you are in the lifecycle and price accordingly. In general terms, the pricing curve will be the opposite of the growth curve, if you were to plot one over the other.
All businesses will benefit from having products at different stages of the product lifecycle. This means that you would simultaneously have products in development, introduction, growth etc to provide balanced levels of income. You can do this by having different products in one market but another way to achieve it is by taking your products into international markets. One particular advantage this can give you is the opportunity to price at the high ‘skimming’ rate in the introduction phase, without having to develop a new product – though you may of course need to adapt either the product or the way you market it for different overseas territories.
Pricing strategies should first and foremost always factor in all costs, including the costs of production, as well as delivery, tariffs, customs, currency, payment protections, and routes to market costs. All of which we have covered elsewhere on the site.
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