10.8 Dynamic aspects of pricing
10.8.1 Significance of the product life-cycle
This refers to the concept that a firm will tend to adopt different pricing practices for a product at different stages of its product life-cycle. This area of pricing strategy has been somewhat neglected in many economics and marketing texts, and indeed in research. However, it is apparent when we consider many products that their prices have changed significantly since the date they were originally introduced in the market. In some cases prices have risen considerably, while in other cases they have dropped significantly. The reasons for these changes and differences need to be examined.
It was stated at the beginning of the chapter that the pricing decision was generally not the most fundamental one that management has to take. The positioning and product decisions tend to be paramount, but, as will be seen in the next chapter, these are long-run decisions and require a long-run frame of analysis. They also involve an interdependence of marketing mix instruments, in particular the interdependence between product characteristics and price. Therefore, any discussion of pricing strategy should take into consideration both this interdependence and the fact that a product’s price should normally change during the course of the product life-cycle. The interdependence aspects are discussed more fully in the next section; this section is concerned
with the relationships between pricing strategy and the product life-cycle.
The long-run decisions regarding whether to produce a particular product or not involve a discussion of investment analysis, which is the topic of the next chapter. Without anticipating this discussion in detail, it involves an examination of profits or cash flows over the whole lifetime of a project. This in turn means that future prices of the product have to be estimated. Since demand and cost factors change over a product’s life-cycle it follows that the product’s price is likely to change during the course of the cycle. It is of great importance to management to be able to estimate these changes as
accurately as possible before launching the product in order to make the initial fundamental decision on whether to produce the product.