Understanding the product life cycle (PLC) is critical to decisions made regarding price changes, especially in a Business-to-Business (B2B) environment. Whether you are in the introductory, growth, maturity, or decline stage, will determine how price changes can impact revenues and margins.
First, it is crucial to understand which stage of the PLC you are in for any given product. This can be accomplished with constant monitoring, and analysis to understand churn, velocity, and other key metrics. Once determined, you need to know what to expect. For example, raising prices in the growth and maturity stages typically has a positive impact on revenues and margins. Lowering prices typically only works in the decline stage to liquidate stock or manufacturing capacity as we move on to the next product evolution. Recognizing in which stage we are operating, along with the competitive pressures and abilities, greatly enhance our ability to change prices to meet the market expectations, while maximizing revenue and margin potential (commonly known as price optimization).
While during the Growth stage, increasing prices typically lead to higher revenues and higher profits, we must pay special attention to competitor actions. Is this product quickly converted into a commodity? If so, the growth stage could be short-lived. If competitors can quickly reproduce the product and your customer’s switching costs are low, raising prices too fast and too often can lead to declining revenues through lost volume. Moreover, if the product cannot be easily reproduced or your customers’ switching costs are high, there is more quantified value in your offering that can be captured in the price. By raising prices to match this value, we can increase our revenues and margins exponentially, due to increasing volumes during the growth stage.
In our experiences, we have seen this work well and also fail spectacularly:
In one client’s experience, before bolstering analytic capacity with key metrics, we observed a failure to recognize the small switching costs lead to underestimating the duration of the growth stage. The result? They kept prices elevated; competition circled like hawks; and before they knew it, their products were an afterthought to their customers.
However, the flip side is just as dramatic. When this client and group of product managers (althought a different product line) were able to quantify the value, their customers should achieve. In this case, no other competitors could offer anything close to their product line they priced to the value during the growth stage, helped secure other ancillary business, and dramatically exceeded profitability expectations.
While there are always exceptions, where have you seen success (or failure) with pricing strategies and the PLC?
Next week, part two in this series: New Product Pricing, setting the life cycle cadence.
Contact us for a Pricing Life cycle Audit – one product or the entire portfolio.
#Vern Lennon #Mike Davis
