10.8.2 Early stages of the product life-cycle
The evidence available,
12–14
tends to suggest that price elasticity can be
expected to decrease for the first three phases of the cycle: introduction, growth and maturity. At the introduction stage there is normally much expenditure on promotion to gain recognition and awareness; discounting, coupons and free samples are common. This means that a market penetration strategy is often advantageous, because demand is highly elastic. As the product gains in image and brand loyalty, and product differentiation increases, demand becomes less elastic, and prices are generally raised.
Of course, it is easy to think of products where the opposite has occurred. This applies in particular to high-technology consumer durables, like VCRs, microwaves and mobile phones. Consumer behaviour in this situation involves innovators and early adopters being willing to pay high prices to own a product that has some prestige value in terms of being novel and exclusive. Thus demand tends to be less elastic and a market skimming strategy is advantageous. In this case the price can fall considerably as the product passes through the introduction and growth stages. Competition springs up, often with better or more advanced products, and unit costs fall on account of economies of scale and learning curve effects.
10.8.3 Later stages of the product life-cycle
Once a product has reached maturity there is usually a considerable amount of competition in the market. Emphasis tends to switch from product innovation to process innovation; products become more standardized and cost minimization becomes an important factor. At this point, evidence suggests that demand elasticity increases again, as the product moves into the decline phase. Curry and Riesz have found that the mean price of all brands within a product form tends to decline over time (net of inflation), and that the price variance with in a designated product form also tends to decline over time. This is again what one would expect with an increase in competition and the availability of close substitutes. Curry and Riesz suggested that ‘Price, which previously may have been a real or fictitious surrogate for product quality, gradually loses its flexibility as both a strategic and functional marketing variable.’ This conclusion appears to ignore the promotional potential in
pricing. This aspect and the relationship between price and product quality are considered in the next section.
10.9 Other pricing strategies
This section is rather miscellaneous in nature; it discusses a number of other pricing strategies that are found in practice, but which are more difficult to model in economic terms. This does not mean that these strategies do not help the firm to maximize profit in the short or long run, but that they tend to relate to more complex aspects of consumer behaviour that are not generally taken into consideration in the neoclassical model. It is more appropriate to refer to these models as behavioural models.
These models generally try to identify the key factors that determine consumer buyer behaviour. Zeithaml’s mean send model is a good example; this examines perceived quality, perceived price, the price–quality relationship and perceived value. These factors are now considered in turn, along with various pricing strategies that are based on them.
10.9.1 Perceived quality
This concept is a subjective assessment, similar to an attitude, not an objective factor relating to intrinsic physical attributes, although obviously the latter serve as cues from which consumers often infer quality. Thus perceived quality represents an abstract concept of a global nature, and judgements made regarding it are made in a comparative context. Other non-physical cues are extrinsic; these include brand image, store image, advertising level, warranty, and of course price, which is examined in more detail shortly. These cues tend to be more important in purchase situations when intrinsic cues are not available and when there is more perceived risk, for example many services, and when quality is difficult to evaluate, as with experience goods, i.e. goods which have to be experienced before the consumer can evaluate the quality.