Page 175 - DMGT408DMGT203_Marketing Management

Marketing Management/Essentials of Marketing

Notes The product line at this stage is almost always limited to one or a few to minimise production
and inventory costs. During this stage, the company attempts to differentiate and position its
new product to gain competitive advantage over solutions that customers were buying
previously to satisfy target need and want.
Various factors affect pricing decisions of a new product, such as new product’s perceived value
to consumer; how fast competitors can copy it; the availability of close substitutes; the effect of
price on sales volume, and costs. Generally, for a pioneering product, or a significantly improved
new product, companies adopt high-price high-promotion strategy. However, depending on
objectives, a company can use any one of the two important pricing strategies during introduction
of a new product: Skimming pricing strategy, or penetration pricing strategy.
Skimming Pricing: For this strategic decision to be effective the product awareness is viewed as
low, those who are aware or become aware are willing to pay a high price to own the product. This
strategy can also be appropriate when the market size is large and not much time is available
before the competition appears. Similarly, this strategy can also work in niche markets where
customers are relatively insensitive to price, and owning the product is important, such as Apple
computers keeps its prices high when it introduces a new product. Typically, this has been the case
with computers, printers, Internet, new software, and cell phone etc. Initially, these durables and
Internet services were priced quite high. The company’s objective is to gain as much margin per
unit as possible. This helps company to recover its new product investment relatively fast.
Penetration Pricing: This strategy allows the company to strive for fast market development
and the focus is on long-term objectives of market share and profit maximisation. Price is kept
low and promotion is high. The market is seen as large and characterised by intense competition,
and consumers who are aware or become aware are very willing to buy the product at an
affordable price. In fact, the market is viewed as price sensitive.

Example: Nirma and some other companies used this strategy in India. Most Japanese
and Korean companies use this strategy.
This strategy can also work when the market is large and any serious threat from competition is
not anticipated. In this age of rapid strides in science and technology, the competition is almost
always around the corner and it is rare to have such an opportunity. This can work with me - too
product launches, but for a company that has invested millions in the development of a new
product, probably it would prefer to recover its investment and earn profits early.
During introduction, particularly for mass-market, small-value products, promotion expenses
for advertising, sales promotion, and sales force are high in terms of percentage of total sales.
The foremost communication task at this stage is to build awareness about the unique features
and benefits and ensure product availability. This is expensive but necessary to convince
customers to try the product.
The importance of distribution set up is particularly significant for consumer product companies.
The availability of consumer products at convenient locations where consumers generally shop
for such products is quite important, keeping in view the large amounts spent on promotion to
make consumers in the target market aware and induce new-product trial among customers.
Most firms use their established distribution network for a new product.
7.4.2 Growth Stage

The growth stage of life cycle is characterised by a sharp rise in sales. Only a small percentage of
new products introduced survive to reach the growth stage. Important improvements in the
product continue, but at reduced rate. Increased brand differentiation is attempted primarily by
adding new features. Product line expands to attract new customer segments. The intensity of
competition increases, and competitors offer increased choices to consumers in terms of features,
packaging and price.

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