Question

Each product will have a life cycle, although its exact shape and length is not known in advance. Briefly explain each phase of the product life cycle. What is competition-based pricing? Distinguish between Market-Skimming Pricing and Market Penetration Pricing. Briefly describe the steps in the new product development process.

Answer 1

Product life cycle :

The product life cycle has 4 very clearly defined stages, each with its own characteristics that mean different things for business that are trying to manage the life cycle of their particular products.

Introduction Stage – This stage of the cycle could be the most expensive for a company launching a new product. The size of the market for the product is small, which means sales are low, although they will be increasing. On the other hand, the cost of things like research and development, consumer testing, and the marketing needed to launch the product can be very high, especially if it’s a competitive sector.

Growth Stage – The growth stage is typically characterized by a strong growth in sales and profits, and because the company can start to benefit from economies of scale in production, the profit margins, as well as the overall amount of profit, will increase. This makes it possible for businesses to invest more money in the promotional activity to maximize the potential of this growth stage.

Maturity Stage – During the maturity stage, the product is established and the aim for the manufacturer is now to maintain the market share they have built up. This is probably the most competitive time for most products and businesses need to invest wisely in any marketing they undertake. They also need to consider any product modifications or improvements to the production process which might give them a competitive advantage.

Decline Stage – Eventually, the market for a product will start to shrink, and this is what’s known as the decline stage. This shrinkage could be due to the market becoming saturated (i.e. all the customers who will buy the product have already purchased it), or because the consumers are switching to a different type of product. While this decline may be inevitable, it may still be possible for companies to make some profit by switching to less-expensive production methods and cheaper markets.

competition-based pricing :

Competition-based pricing is a pricing method that makes use of competitors' prices for the same or similar product as basis in setting a price. This pricing method focuses on information from the market rather than production costs and product's perceived value. The price of competing products is used a benchmark. The business may sell its product at a price above or below such benchmark. Setting a price above the benchmark will result in higher profit per unit but might result in less units sold as customers would prefer products with lower prices.On the other hand, setting a price below the benchmark might result in more units sold but will cause less profit per unit.

Distinguish between Market-Skimming Pricing and Market Penetration Pricing :

1. Penetration Pricing can be described as a pricing method adopted by the firm to attract more and more customers, in which the product is offered at low price at the early stage. Conversely, skimming pricing is used to mean a pricing technique, in which high price is charged at the beginning to earn maximum profit.
2. Penetration pricing aims at achieving a greater market share, by offering the product at low prices. As against the object of using skimming pricing strategy is to earn maximum profit from the customers, by offering the product at the highest price.
3. Penetration pricing strategy is put into practice when the demand for the product is relatively elastic. On the other hand, skimming pricing is used when the demand for the product is inelastic.
4. In case of penetration pricing, the profit margin is low, whereas, in skimming pricing, the profit margin is very high.
5. As the price of the product is initially low in penetration pricing, huge quantities of product is sold by the firm. As against, due to high price of the product customer demand small quantity of the product, in case of skimming pricing.

New product development process:

The eight stages or process or steps involved in the development of a new product are listed as follows:

1. Idea generation.
2. Idea screening.
3. Concept testing.
4. Business analysis.
5. Product development.
6. Test marketing.
7. Commercialization.
8. Review of market performance.

Now let's discuss each stage in the process of a new-product development.

1 . Idea generation -

The first step in new-product development is idea generation.

New ideas can be generated by:

• Conducting marketing research to find out the consumers' needs and wants.
• Inviting suggestions from consumers.
• Inviting suggestions from employees.
• Brainstorming suggestions for new-product ideas.

2. Idea screening -

Before selecting or rejecting an idea, the following questions are considered or asked:

1. Is it necessary to introduce a new product?
2. Can the existing plant and machinery produce the new product?
3. Can the existing marketing network sell the new product?
4. When can the new product break even?

If the answers to these questions are positive, then the idea of a new-product development is selected else it is rejected. This step is necessary to avoid product failure.

3. Concept testing -

Concept testing is done after idea screening.In this stage of concept testing, the company finds out:

• Whether the consumers understand the product idea or not?
• Whether the consumers need the new product or not?
• Whether the consumers will accept the product or not?

Here, a small group of consumers is selected. They are given full information about the new product. Then they are asked what they feel about the new product. They are asked whether they like the new product or not. So, concept testing is done to find out the consumers' reactions towards the new product.

4. Business analysis -

Business analysis is a very important step in new-product development. Here, a detailed business analysis is done. The company finds out whether the new product is commercially profitable or not.Under business analysis, the company finds out...

1. Whether the new product is commercially profitable or not?
2. What will be the cost of the new product?
3. Is there any demand for the new product?
4. Whether this demand is regular or seasonal?
5. Are there any competitors of the new product?
6. How the total sales of the new product be?

5. Product development -

At this stage, the company has decided to introduce the new product in the market. It will take all necessary steps to produce and distribute the new product. The production department will make plans to produce the product. The marketing department will make plans to distribute the product. The finance department will provide the finance for introducing the new product. The advertising department will plan the advertisements for the new product. However, all this is done as a small scale for Test Marketing.

6. Test marketing -

Test marketing means to introduce the new product on a very small scale in a very small market. If the new product is successful in this market, then it is introduced on a large scale. However, if the product fails in the test market, then the company finds out the reasons for its failure. It makes necessary changes in the new product and introduces it again in a small market. If the new product fails again the company will reject it.Test marketing reduces the risk of large-scale marketing. It is a safety device. It is very time-consuming. It must be done especially for costly products.

7. Commercialization -

If the test marketing is successful, then the company introduces the new product on a large scale, say all over the country. The company makes a large investment in the new product. It produces and distributes the new product on a huge scale. It advertises the new product on the mass media like TV, Radio, Newspapers and Magazines, etc.

8. Review of market performance -

The company must review the marketing performance of the new product.

It must answer the following questions:

1. Is the new product accepted by the consumers?
2. Are the demand, sales and profits high?
3. Are the consumers satisfied with the after-sales-service?
4. Are the middlemen happy with their commission?

The company must continuously monitor the performance of the new product. They must make necessary changes in their marketing plans and strategies else the product will fail.