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.
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. 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.
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, which is what 3M had to do when it introduced Post-it Notes.
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.
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 a buck.
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.
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.
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 laundry detergent 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.
Products in your online store evolve through different stages from launch to removal from your catalogue. The price set for each item strongly influences sales success. A dynamic pricing strategy for your products’ lifecycle will help ensure you always get maximum return on investment. Would you like to know how?
The Product Life Cycle (PLC) identifies the product’s market position, which largely defines the stage of its usefulness, and anticipated sales.
Optimal product lifecycle performance needs to be supported by marketing strategies which will help you get closer to consumers’ needs. Adapting the pricing strategy to the product’s market journey is essential to optimise the opportunities and profitability of each campaign.
The product lifecycle involves four phases: launch, growth, maturity, and decline or removal. Which pricing strategies are best for each?
Product launch and penetration pricing
A price skimming strategy can be key in helping you set your product’s initial selling price. If your brand has previously launched similar products, evaluate historical data before setting your new prices. You need to consider the effect of price on demand volume for your product launch to succeed, and the necessary available stock levels to meet your sales forecast.
A competitor monitoring tool will help you shed light on this research by analysing your competitors’ catalogues before the launch.
Market growth and dynamic pricing
When the product reaches its target for market penetration, a dynamic pricing strategy will allow you to maintain revenue throughout this season, while remaining competitive in the market. To find the best prices you must consider production costs, profit margins, the purchase price value in the geographic sales area, etc.
The advantage of dynamic pricing is that you can allow for as many factors as you deem necessary to trigger the required fluctuations in your price adjustment. Sales units, available stock in the warehouse, increase in demand, the sales volume of another product in the same category, etc. You will be able to find out details of as many as you deem necessary in your business.
Maturity and promotional offers
At this stage, your brand’s goal will be to maintain interest and promote continuity of transactions through promotional campaigns. Promotion planning is essential for discounts to arrive at the right time and in the right way for the consumer.
Using promotion optimisation software will help you find the optimal promotional value to boost your sales at the price that brings the highest profit. As this stage progresses, product demand will decrease, so you will need to set the minimum value you have to reach to move to the next stage: decline.
Product decline and widespread discounts
The last phase of a product’s life cycle is decline, possibly resulting in complete removal from the catalogue, or putting products on standby if they are seasonal demand products. You will need to work with prices that allow you to release accumulated stock in your warehouse, through bundle promotions or by offering products related to other items.
To find out where on the scale is right for you to start offering your discounts, get a valuable tool like Reactev’s Pricing Strategy Simulator. Take advantage of your users’ historical sales and behaviour data to find the right discount flow for your products. This will help you sell at the optimal price based on predicted sales, without losing by discounting too much, or bringing down your sales target due to insufficient discounting.
Optimising your pricing strategy at each stage of the PLC is critical to remaining aligned with consumer expectations and, therefore, to the product’s success in the marketplace.