Today, new products are introduced more frequently, and the product life cycle may merely be merely months. At the same time, customers expect more for less, and the competition is applying price pressure. All of this is complicated by the organization’s product portfolio. So it’s no wonder that companies struggle with pricing.

Managing the trade-offs, such as those between price and volume or price and profit or price and market share, and taking the broader product portfolio into consideration are two things every company must consider to effectively price a product/service throughout its life cycle. Why are these two factors so important?

First, most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time.

Second, when you have multiple generations of a product in a market, a price move for one can have important implications for others. Therefore, it is important to consider both of these factors across the three major phases of a product or service: launch, midlife, and late life.

Pricing Across the 3 Major Phases of the Product’s Life

The launch phase: Correctly setting the launch price for a product or service can reset market price expectations and boost the profit trajectory across the remainder of that offering’s life cycle. In the launch phase, concentrate on three imperatives:

• setting a launch price that maximizes the long-term capture of value, avoiding “anchor effects” from older products, and working the product portfolio to a company’s advantage

Scenario-based analysis that incorporates different pricing models, potential responses by customers and competitors, and the implications for earnings is a valid technique for helping set a launch price that maximizes return. This approach can help companies avoid common mistakes, such as setting the launch price too low or reducing a product’s price soon after launch. This approach can also help minimize the degree to which the price of existing products will drag down the price for new ones or vice versa.

When the new product/service is part of an existing portfolio, it is important to have a pricing strategy that will help you avoid discounting and instead compete at higher average price points based on product benefits.

The midlife phase: You’ve launched the product and gained market traction. The product enters mid-life. This phase presents both opportunity and risk: it often occurs when companies earn a majority of a product’s operating profit, but also when “me too” products may appear, and when price compression is most extreme. Many organizations fail to revisit price during this stage.

This is the time to fine-tune your pricing strategy. Doing so requires that you anticipate trigger events, competitor moves, and monitor market conditions so you can consider new pricing models that may change the game. By monitoring the market and competitors, you can keep a pulse on trigger events (price moves, competitors’ product introductions, shifts in customer demand), and adjust the product/service price accordingly.

The late-life phase. Many organizations believe that the only price for a product in the late-life phase is down. But this phase may be an opportune time to raise rather than lower prices. The reason is that its “all in” costs may have increased, or its inherent value for the remaining customers may not have decreased as much as it has for those that moved on. Indeed, its value may even have increased for some users. All this may translate into a willingness to pay higher prices.

Whatever choice a company makes, it must have deep insight into the true cost of serving a market and the customer segments still buying the product. Organizations should be guided by three late-life pricing imperatives:

• capitalizing on pockets of customers with a high willingness to pay (certain customers may be less price sensitive for an older product because they are more comfortable with it, see more value in it, or regard switching as cost-prohibitive)
• minimizing competition with next-generation products
•  actively working to reduce unfavorable product proliferation

While you first instinct may be to discount older products before or just after the launch of a new one, excessive markdowns may hurt newer offerings by making older ones seem like a better value.

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The Advantages of Pricing Properly Across the Life Cycle

Companies that capture price advantages across the life cycle of their products have several distinct characteristics. These organizations continually strive to think across life cycle stages, building all their questions and analyses into that framework. Managers regularly scan internally and externally for information about potential trigger events. Their level of energy and activity—the ability to undertake fast, deep customer research or to produce insightful analyses on a multitude of variables—is higher than that of most companies. In short, their capabilities reflect the more dynamic and interdependent pricing environment that prevails when companies manage product life cycles.

Consider these actions if you aspire to be one of these organizations:
•   Examine life cycle pricing up front. The pricing of new products at savvy companies is not a reactive, ad hoc process but a core competency undertaken at early stages of product development. Such companies consider alternative price–volume trade-offs and strategies over time and envision how each scenario might play out across different customer segments. The process explicitly incorporates price moves during the life cycle and anticipates internal or external triggers that might prompt the company to shift prices up or down.
•   Maintain a longitudinal view. Nothing should fall between the cracks when a company manages prices over time and across products in its portfolio. Organizations that capture the price advantage escape the common “launch and forget” pricing pitfall once new products hit the market. Their review processes explicitly monitor life cycle pricing performance, while properly aligned incentives keep employees focused on the opportunity. Much of life cycle pricing inherently involves setting expectations about the way prices and volumes may play out. Sophisticated companies track these assumptions and regularly check performance against them.
•   Find ways to increase life cycle value. Companies that manage life cycle pricing well are dynamic and adaptive. Often, these qualities call for a level of cross-functional coordination that transcends the pricing function: product development, marketing, competitive intelligence, sales, and operations may all be involved.

Beginning with a high-level plan for managing a product to the end of its life cycle, these companies refine their approach by constantly monitoring market conditions, the moves of competitors, internal operational changes, and customer perceptions. This work requires ongoing data collection and analysis. If that’s not in your wheelhouse, no worries. That’s what we’re here for. 

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