PRICING OVER PRODUCT LIFE-CYCLE

PRICING OVER THE LIFE-CYCLE OF A PRODUCT

Many products generally have a characteristic known as ‘perishable distinctiveness'. This means that a product which is distinct when new, degenerates over the years into a common commodity. The process by which the distinctiveness gradually disappears as the product merges with other competitive products has been rightly termed by Joel Dean as "the cycle of competitive degeneration". The cycle begins with the invention of a new product, and is often followed by patent protection, and further development to make it saleable. This is usually followed by a rapid expansion in its sales as the product gains market acceptance. Then competitors enter the field with imitation and rival products and the distinctiveness of the new product starts diminishing. The speed of degeneration differs from product to product. The innovation of a new product and its degeneration into a common product is termed as the life-cycle of a product.  

There are five distinct stages in the life-cycle of a product as shown in Figure I.

Figure I: Life-cycle of a Product

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PRICING METHODS

Pricing is an important element of the marketing mix. Pricing is affected not only by the cost of manufacturing the product, but also by (i) the company's objectives in relation to market share and sales; (ii) the nature and intensity of competition; (iii) stage of the product life-cycle at which the product is currently positioned; (iv) nature of product whether as consumer or industrial product and if the former whether it is a luxury or necessity. Before making any pricing decision it is important to understand all these factors.

Although there are several factors affecting the pricing decisions, it would be useful to discuss the pricing methods most commonly used. These methods are:

1.   Cost-plus or Full-cost pricing

2.   Pricing for a rate of return, also called target pricing

3.   Marginal cost pricing

4.   Going rate pricing, and

5.   Customary prices.

The first three methods are cost-oriented as the prices are determined on the basis of costs. The last two methods are competition-oriented as the prices here are set on the basis of what competitors are charging.

1. Cost-plus or Full-cost Pricing

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PRICING DECISION

Price is an important element of the marketing mix. It can be used as a strategic marketing variable to meet competition. It is also a direct source of revenue for the firm. It must not only cover the costs but leave some margin to generate profit for the firm. However, price should not be so high as to frighten the customers. Price is also an element which is highly perceptible to customers and significantly affects their decisions to buy a product. In general, price directly determines the quantity to be sold.  

DETERMINANTS OF PRICING

Pricing decisions are usually determined by demand, competition and cost. We shall discuss each of these_, factors separately. We take demand first.

Demand

The popular ‘Law of Demand' states that "higher the price; lower the demand, and vice versa, other things remaining the same’’. In season, due to plentiful supplies of certain, agricultural products, the prices are low and because of low prices, the demand for them increases substantially. You can test the validity of this law yourself in your daily life. There is an inverse relationship between price and quantity demanded. If price rises, demand falls and if the price falls, the demand goes up. Of course, the law of demand assumes that there should be no change in the other factors influencing demand except price. If any one or more of the other factors, for instance, income, the price of the substitutes, tastes and preferences of the consumers, advertising, expenditures, etc. vary, the demand may rise in spite of a rise in price, or alternatively, the demand may fall in spite of a fall in price. However, there are important exceptions to the law of demand.

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PACKAGING

Packaging has been variously defined in both technical and marketing literature. One of the most quoted definition is ‘Packaging is the art, science and technology of preparing goods for transport and sale'. This definition brings out two salient aspects of packaging. These are:

a)   It has to help in the physical transportation and sale of the products packaged.

b)   Packaging as a function consists of two distinct elements, (i) the positive aspects,viz., the science and technology related to package design, selection of packaging materials etc. and (ii) the behavioural aspects, viz., the art of product design which is associated with consumer motivation research, buying research, etc.  

The last aspect has been highlighted in another definition of packaging. ‘Properly designed, the package should enhance the value of its contained product, and impart that impression, either directly or subtly, to the customer'. The role of packaging in value enhancement is increasingly becoming important in consumer marketing today.

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BRANDING

 A crucial step in the branding strategy is deciding on a specific brand name for the product that is being introduced. In the earlier times when the concept and practice of branding was much less developed, very often the family name/surname was used. Some of those are still very much alive, for example, Siemens or Ford. The other common method of branding was by way of addressing the product range of the company. Two famous examples are General Motors and General Electric. It seems the function that brand was supposed to perform was either to indicate the source or the origin of the product (family name) or indicate the product range. However, a brand name has emerged as one of the most important elements of the merchandising function in the recent times and will become more and more crucial as the competition becomes more severe in India. Let us understand what the conceptual meaning of the terms brand and brand name is.

Brand: Brand is a word, mark, symbol, device or a combination thereof, used to identify some product or service. The definition clearly focuses on the function of a brand, that is, to identify, irrespective of the specific means employed for the identification.

Brand Name: The American Management Association defines it thus: "Brand name is a part of a brand consisting of a word, letter, group of words or letters comprising a name which is intended to identify the goods or services of a seller or a group of sellers and to differentiate them from those of competitors."
 

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