Chapter 7
Pricing Over the Product Life Cycle

Adapting Strategy in an Evolving Market

Products, like people, typically pass through predictable phases. A product is conceived and eventually “born;” it “grows” as it gradually gains in buyer acceptance, eventually it “matures” as it attains full buyer acceptance, and then it ultimately “dies” as it is discarded for something better. There are, of course, exceptions to this process. Death sometimes comes prematurely, dashing expectations before they even begin to materialize; youth sometimes extends inordinately, deceiving the unwary into thinking it can last forever. Still, the exceptions notwithstanding, the typical life pattern affords managers a chance to understand the present and anticipate the future of most products. Such understanding, anticipation, and preparation make up a firm’s long-run strategic plan. Profitable pricing is the bottom line measure of that plan’s success.

The market defined by the introduction of a new product evolves through four phases: development, growth, maturity, and decline, as Exhibit 7-1 illus-trates.¹ In each of its phases, the market has a unique personality. Accordingly, one’s pricing strategy must vary if it is to remain appropriate, and one’s tactics must vary if they are to remain effective.

New Products and the Product Life Cycle

New products play an integral, albeit frequently misunderstood, role in the product life cycle. Every product life cycle begins with the launch of an innovative new product. When the Apple iPod first hit store shelves in 2002, it transformed the way that consumers purchased, stored, and consumed music. Today, the market for portable music players with electronic storage capacity is in the growth stage of the product life cycle with few signs of reaching maturity any time soon. Whereas all product life cycles begin with the launch of a new product, the converse is not always true—not all new products start a new life cycle. Companies frequently launch new products at the maturity stage to refine their differentiation relative to the many competitors in the market. Even when a new product provides a completely new benefit, it may not be an innovation from the standpoint of buyers. For example, drugs are so readily accepted as cures in our culture that new ones are generally adopted with little hesitation by both doctors and patients. Similarly, most new consumer packaged goods products and business manufacturing products represent incremental improvements to existing products in a mature product category. This distinction between innovative new products early in the life cycle versus incremental improvements to existing products in mature markets is an important one because the focus for pricing strategy changes depending on the stage.

EXHIBIT 7-1 Sales and Profits Over the Product’s Life from Inception to Demise

Understanding the unique aspects of pricing new products, regardless of their stage in the life cycle, is crucial for a number of reasons. First, new products represent a primary source of organic volume and profit growth, and avoiding pricing mistakes can have both short and long-term impact on financial performance. If priced too high at launch, a new product will fail to achieve the volume necessary to maintain short-term profitability. Conversely, if priced too low, a new product may achieve its volume targets while failing to deliver sufficient profits. The latter scenario, pricing too low at launch, can have long-term implications for future profit growth because existing products are the primary reference price for future products. As we explained in Chapter 6, customers with a low reference price will frame the purchase as a loss, leading to greater price sensitivity and lower willingness-to-pay.

A second reason that new product pricing is especially important is that it represents an opportunity to redefine the process and considerations that determine what and how customers purchase. Customers are less knowledgeable about new products and, hence, must educate themselves about new features, benefits, and, ultimately, the value that the product might deliver. This lack of knowledge represents an opportunity and a challenge for marketers. The opportunity stems from the fact that customers are more receptive to new value communications, price metrics, policies, and price points. As a result, new product launches represent one of the best opportunities to introduce value-based pricing to a market because customers are prepared for, and even expecting, change. The challenge stems from the fact that customers perceive higher risk, which makes them reluctant to purchase even what promises to be a good value.

Pricing the Innovation for Market Introduction

An innovation is a product that is unique and so new that buyers find the concept somewhat foreign. It does not yet have a place in buyers’ lifestyles or business practices. The first automobiles, vacuum cleaners, and prepackaged convenience foods initially had to overcome considerable buyer apathy grounded in a lack of awareness of the benefits offered. The first business computers had to overcome skepticism bordering on hostility from managers who thought using a keyboard was beneath them. Today, innovations from acupuncture to Zipcars have encountered similar consumer reluctance, despite their legitimate promise of substantial value. An innovation requires buyers to alter the way they evaluate satisfying their needs. Consequently, before a product can become a success, its market must be developed through the difficult process of buyer education.

By definition, most customers know little about an innovative product and how it might meet their needs in new ways. Hence, successful launches of innovations hinge upon the effectiveness of the education process that customers undergo. An important aspect of that educational process is called information diffusion. Most of what individuals learn about innovative products comes from seeing and hearing about the experiences of others.² The diffusion of that information from person to person has proved especially influential for large-expenditure items, such as consumer durables, where buyers take a significant risk the first time they buy an innovative product. For example, an early study on the diffusion of innovations found that the most important factor influencing a family’s first purchase of a window air conditioner was neither an economic factor such as income nor a need factor such as exposure of bedrooms to the sun. The most important factor was social interaction with another family that already had a window air conditioner.³ This finding has been replicated in dozens of markets ranging from consumer electronics to business computers.

Recognition of the diffusion process is extremely important in formulating pricing strategy for two reasons. First, when information must diffuse through a population of potential buyers, the long-run demand for an innovative product at any time in the future depends on the number of initial buyers. Empirical studies indicate that demand does not begin to accelerate until the first 2 percent to 5 percent of potential buyers adopt the product.⁴ The attainment of those initial sales is often the hardest part of marketing an innovation. Obviously, the sooner the seller can close those first sales, the sooner she will secure long-run sales and profit potential.

Second, “early adopters” are not generally a random sample of buyers. They are people particularly suited to evaluate the product before purchase. In many cases, they are also people to whom the later adopters, or “imitators,” look for guidance and advice. However, even early adopters know little about how attributes or major attribute combinations should be valued. Value communications and effective promotional programs can, therefore, readily influence which attributes drive those initial purchase decisions and how those attributes are valued. Identifying the early adopters and making every effort to ensure that their experience is positive is an essential part of marketing an innovation.⁵

What is the appropriate strategy for pricing an innovative new product? To answer that question, it is important to recognize that consumers’ price sensitivity when they first encounter an innovation bears little or no relationship to their long-run price sensitivity. Both early and late adopters are relatively price insensitive because they lack a reference for determining what would constitute a fair or bargain price. A small number of early adopters will try the product once based on the promise of value almost regardless of price, while later adopters will not try it at any price until they learn from the experience of others.

Given the problem of buyer ignorance, the firm’s primary goal in the market development stage is to define the product’s worth through effective price and value communications as described in Chapter 4. Thus it is important to consider the value message that various list price strategies send to the market. If the seller plans a skim-pricing strategy, the list price should be near the relative value that early adopters will experience. If the seller plans a neutral strategy, the list price should be near the relative value for the more typical potential user. The seller of an innovation should not set a list price for market penetration, however, since the low price sensitivity of uninformed buyers will make that strategy ineffective and may, due to the price–quality effect, damage the product’s reputation. In addition to using list price, marketers must consider other value communication approaches.

Communicating Value with Trial Promotions

Deciding what the list price should be and what price first-time buyers actually pay are entirely separate questions. Determining the actual price for early adopters depends on the relative cost of different methods for educating buyers about the product’s benefits. If the product is frequently purchased, has a low incremental production cost, and its benefits are obvious after just one use, the cheapest and most effective way to educate buyers may be to let them sample the product. For example, satellite operators Sirius and XM built interest in their product through aggressive discounts for placement in rental vehicles with either a low or no cost of trial (satellite radio was typically included in the regular rental fee).

Not all innovative products can be economically promoted by price-induced sampling, however. Many innovations are durable goods for which price-cutting to induce trial is rarely cost-effective. A seller can hardly afford to give the product away and then wait years for a repeat purchase. Moreover, many innovative products, both durables and nondurables, will not immediately reveal their value when sampled once. Few people who sampled smoke alarms, for example, would find them so satisfying that they would yearn to buy more and encourage their friends to do the same. And many innovations (for example, Web-enabled cell phones) require that buyers learn skills before they can realize the product’s benefits. Without a marketing program to convince buyers that learning those skills is worth the effort and strong support to ensure that they learn properly, few buyers will sample at any price, and fewer still will find the product worthwhile when they do. In such cases, price-induced sampling does not effectively establish the product’s worth in buyers’ minds. Instead, market development requires more direct education of buyers before they make their first purchases.

Communicating Value with Direct Sales

For innovations that involve a large dollar expenditure per purchase, education usually involves a direct sales force trained to evaluate buyers’ needs and to explain how the product will satisfy them. The first refrigerators, for example, were sold door-to-door to reluctant buyers who did not yet know they needed such an expensive device. The salesperson’s job was to help buyers imagine the benefits that a refrigerator offered, beyond those that an ice chest was already capable of providing. Only then would those first buyers abandon tradition to make a large capital expenditure on new, risky technology. Business buyers are equally skeptical of the value of new innovations. In the 1950s, most potential users of airfreight service thought they had no need for such rapid delivery. American Airlines built the market for this new innovation by offering free logistics consultation. American’s sales consultants showed potential buyers how this high-priced innovation in transportation could replace local warehouses, thereby actually saving money.⁶ They taught the shippers how to see their distribution problems differently, from a perspective that revealed the previously unrecognized value of rapid delivery by American’s planes.

When the innovation is more complicated than refrigeration or airfreight, even a convincing evaluation of buyers’ needs may leave them too uncertain about the product’s benefits to adopt it. For example, in the early 1990s enterprise software was considered quite a risky purchase because of the high degree of uncertainty about the ability to integrate the software into the company’s IT architecture to do the billing, payroll, and production scheduling that the salesperson claimed it could do. SAP, a market leader in enterprise software, increased the business adoption rate of their software by mitigating this source of uncertainty. SAP did so by providing new customers access to successful installations and by partnering with integration firms to ensure successful implementation. The result was that sales of SAP’s enterprise software increased ninefold in the mid-nineties.

Neither American Airlines nor SAP priced their products cheaply despite their desire for rapid sales growth. Instead, they educated their markets, showing why their products were worth the price, and they aided buyers’ adoption to minimize the risk of failure. They funded these high levels of education and service with the high prices buyers paid for the perceived value of the products. DuPont has employed this same high-price, high-promotion strategy in introducing numerous synthetic fabrics and specialty plastics. Apple employed it in developing the market for personal computers and storable digital music devices and successful innovators in alternative energy are using it today.

Marketing Innovations Through Distribution Channels

Not all products have sufficiently large sales per customer to make direct selling practical. This is particularly true of innovative products that are sold indirectly through channels of distribution. However, the problem of educating buyers and minimizing their risk does not go away when the product is handed over to a distributor. It simply makes the need to rely on an independent distribution network problematic. The innovator must somehow convince the distributors who carry the product to promote it vigorously. One way to do this is with low wholesale pricing to distributors. The purpose of the low wholesale prices is not for distributors to pass the discounts on to consumers. The purpose is to leave distributors and retailers with high margins, giving them an incentive to promote the product with buyer education and service. While that works whenever distribution is relatively exclusive, there is the risk whenever distribution is less restricted that competition will simply cause the extra margin to be passed on in price discounts, thus losing the promotional incentive. One way to maintain distribution margins is to refuse to deal with distributors or retailers that discount during the innovation stage. This strategy of resale price maintenance has become easier in the United States as a result of recent legal rulings, but the rules are tricky. The rules at the time of this edition are described in Chapter 13, but they should be confirmed with legal counsel before proceeding. Alternatively, a company can allow discounting but pay incentive fees for stocking the product, for co-op advertising, for in-store displays, for premium shelf space, and for on-site service and demonstration. They may also offer incentives directly to the middleman’s salespeople for taking the time to understand and promote the product.

Pricing New Products for Growth

Once a product concept gains a foothold in the marketplace, the pricing problem begins to change. Repeat purchasers are no longer uncertain of the product’s value since they can judge it from their previous experience. First-time buyers can rely on reports from innovators as the process of information diffusion begins. In growth, therefore, the buyer’s concern about the product’s utility begins to give way to a more calculating concern about the costs and benefits of alternative brands. Unless a successful innovation is unusually well protected from imitation, the market is ripe for the growth of competition. As competition begins to break out in the innovative industry, both the original innovator and the later entrants begin to assume competitive positions and prepare to defend them. In doing so, each must decide where it will place its marketing strategy on the continuum between a pure differentiated product strategy and a pure cost leadership strategy.⁷

With a differentiated product strategy, the firm focuses its marketing efforts on developing unique attributes (or images) for its product. In growth, the firm must quickly establish a position in research, in production, and in buyer perception as the dominant supplier of those attributes. Then, as competition becomes more intense, the uniqueness of its product creates a value effect that attenuates buyers’ price sensitivity, enabling the firm to price profitably despite increasing numbers of competitors. Apple created such a reputation during the growth stage of computers with its user-friendly graphical interface, proprietary operating system, and distinct product designs. As a result, Apple has always carried a premium relative to Windows-based machines with similar capabilities. Intel did this for its chips, creating a customer perception that a computer was more reliable with “Intel inside.” Paccar’s heavy-duty trucks carry a premium from the reputation the company built for exceptional reliability and style.

With a cost leadership strategy, the firm directs its marketing efforts toward becoming a low-cost producer. In growth, the firm must focus on developing a product that it can produce at minimum cost, usually but not necessarily by making the product less differentiated. The firm expects that its lower costs will enable it to profit despite competitive pricing. The high share winner in the market for more efficient batteries, necessary for all-electric cars and to store power from wind farms, will almost certainly be the one that is able to drive down manufacturing costs faster than its competitors.

Pricing within a Differentiated Product Strategy

A differentiated product strategy may be focused on a particular buyer segment or directed at multiple segments. In either case, the role of pricing is to collect the rewards from producing attributes that buyers find uniquely valuable. If the differentiated product strategy is focused, the firm earns its rewards by skim pricing to the segment that values the product most highly. For example, Godiva (chocolate), BMW (automobiles), and Gucci (apparel) use skim pricing to focus their differentiated product strategies. In contrast, when the differentiated product strategy is more broadly aimed at multiple segments, companies should set neutral or penetration prices and earn rewards from the sales volume that its product can then attract. Procter & Gamble (consumer packaged goods), Toyota (automobiles), and Caterpillar (construction equipment) use neutral pricing to sell their differentiated products to a large share of the market.

Penetration pricing is also possible for a differentiated product. This is common in industrial products where a company may develop a superior piece of equipment, computer software, or service, but price it no more than the competition. The price is used to lock in a large market share before competitors imitate, and therefore eliminate, the product’s differential advantage. Although the Windows operating system is clearly a unique product, Microsoft used penetration pricing to ensure that its product became the dominant architecture and default standard for software application programmers. Penetration pricing is less commonly successful for differentiated consumer products, since buyers who can afford to cater to their desire for the attributes of differentiated products can often also afford to buy them without shopping for bargains.

Pricing within a Cost Leadership Strategy

Like the differentiated product strategy, a cost leadership strategy can also be either focused or more broadly based. If a firm is seeking industry-wide cost leadership, penetration pricing often plays an active role in the strategy’s implementation. For example, when the source of the firm’s anticipated cost advantage depends on selling a large volume, it may set low penetration prices during growth to gain a dominant market share. Later, it maintains those penetration prices as a competitive deterrent, while still earning profits due to its superior cost position. Wal-Mart uses this strategy successfully to achieve substantial cost economies in distribution and high sales per square foot. Even when the source of the cost advantage is not a large volume but a more cost-efficient product design, a firm may set low penetration prices to exploit that advantage. Japanese manufacturers used penetration pricing to exploit their cost advantages and dominate world markets for TV sets after extensively redesigning the manufacturing production process with automated insertion equipment, modular assembly, and standardized designs.

At this point, a definite word of warning is in order. Much of the business literature implies that penetration pricing is the only proper strategy for establishing and exploiting industry-wide cost leadership. That literature is dangerously misleading. If a market is not particularly price sensitive, penetration pricing will not enable a firm to gain enough share to achieve or exploit a cost advantage. In this case, neutral pricing is the most appropriate pricing strategy and can still be consistent with the successful pursuit of cost leadership. The marketing histories of many cost leaders (for example, Honda in electric generators and R. J. Reynolds in cigarettes) confirm that industrywide cost leadership is attainable without penetration pricing. The battle for the dominant share and cost leadership in those markets and many others is fought and won with weapons such as cost-efficient technological leadership, advertising, and extensive distribution. In many cases, the battle is won even against competitors with lower prices.

Penetration pricing is not always appropriate when cost leadership is based on a narrow customer focus. If the focused firm’s cost advantage depends directly on selling to only one or a few large buyers, penetration pricing may be necessary to hold their patronage. For example, suppliers that sell exclusively to Wal-Mart or to the auto industry enjoy lower costs of selling and distribution but usually have to charge penetration prices to retain that business. When, however, the firm’s cost advantage is derived simply from remaining small and flexible, neutral pricing is compatible with focused cost leadership. For example, specialized component assembly is often done by small contract manufacturers that are cost leaders because their small size enables them to maintain non-union labor, low overhead, and flexibility in accepting and scheduling orders. Since those cost advantages do not depend on maintaining a large volume of orders, and since the buyers that those companies serve are more concerned about quality and reliability than about price, their pricing strategy is usually neutral. When an order requires an especially fast turnaround and the buyer has little time to look for alternatives, those same manufacturers will occasionally even skim price their services.

Price Reductions in Growth

The best price for the growth stage, regardless of one’s product strategy, is normally less than the price set during the market development stage. In most cases, new competition in the growth stage gives buyers more alternatives from which to choose, while their growing familiarity with the product enables them to better evaluate those alternatives. Both factors will increase price sensitivity over what it was in the development stage. Moreover, even if a firm enjoys a patented monopoly, reducing price after the innovation stage can speed the product adoption process and enable the firm to profit from faster market growth.⁸ Such price reductions are usually possible without sacrificing profits because of cost economies from an increasing scale of output and accumulated experience.

Pricing in the growth stage is not generally cutthroat. The growth stage is characterized by a rapidly expanding sales base. New firms can generally enter and existing ones expand without forcing competitors’ sales to contract. For example, sales of Apple’s iPhone continue to grow despite loss of some market share to new entrants in the smart phone category. Because new entrants can grow without forcing established firms to contract, the growth stage normally will not precipitate aggressive price competition. The exceptions occur in the following situations:

1. Production economies resulting from producing greater volumes are large and the market is price-sensitive. Consequently, each firm sees the battle for volume as a battle for long-run survival (as often occurs in the electronics industry).
2. Sales volume determines which of competing technologies becomes the industry standard (as occurred in the market for digital music players).
3. Growth in production capacity jumps ahead of the growth in sales (as occurred in the cell phone market), creating excess capacity.

In the cases above, price competition can become bitter as firms sacrifice short-term profit during growth to ensure their viability in maturity.

Whether or not pricing competition becomes intense, the most profitable pricing strategies in growth are usually segmented. The logic for this is simple. In the introduction phase, all customers are new to the market and technology is simple. In growth, customers naturally segment themselves between those who are new to the market and those who are knowledgeable and experienced purchasers. For laptop computers, the experienced buyers usually purchase on line, and so get better pricing than less experienced buyers who require the help of in-store staff to select and configure the product.

In addition, different groups of customers emerging during the growth stage may receive different levels of value or have different costs-to-serve. Innovative pharmaceuticals are a case in point. Companies target the highest value application (called an “indication”) with the greatest unmet need to launch their innovation. This enables them to win regulatory approval quickly and win sales at the highest price. Often, however, they follow with additional indications to drive growth that involve selling against cheaper drugs. The challenge is to design discounting options for contracting with different types of payers (such as insurers and governments). Those that can and would limit use of the drug to only the highest value indication must pay the highest price. Those that will enable use of the drug across many indications without restriction qualify for a lower price. Those that mandate use of the drug over competitive alternatives (such as Veterans Affairs hospitals) get the best price. Although prices may be much lower and thus less profitable for the last type, the ability to avoid having to convince every individual doctor to prescribe the drug dramatically cuts the cost of sales.⁹

Pricing the Established Product in Maturity

A typical product spends most of its life in maturity, the phase in which effective pricing is essential for survival, even as latitude in pricing is far more limited. Without the rapid sales growth and increasing cost economies that characterize the growth phase, earning a profit in maturity hinges on exploiting whatever latitude one has. Many products fail to make the transition to market maturity because they failed to achieve strong competitive positions with differentiated products or a cost advantage in the growth stage.¹⁰ Firms that have successfully executed their growth strategies are usually able to price profitably in maturity, although rarely as profitably as at the height of industry growth.

In the growth stage, the source of profit was sales to an expanding market. In maturity, that source has been nearly depleted. A maturity strategy predicated on continued expansion of one’s customer base will likely be dashed by one’s competitors’ determination to defend their market shares. In contrast to the growth stage, when competitors could lose share in an expanding market and suffer only a slower rate of sales increase, competitors that lose share in a mature market suffer an absolute sales decline. Having made capacity investments to produce a certain level of output, they will usually defend their market shares to avoid being overwhelmed by sunk costs.¹¹ Pricing latitude is further reduced by the following factors that increase price competition as the market moves from growth to maturity:

1. The accumulated purchase experience of repeat buyers improves their ability to evaluate and compare competing products, reducing brand loyalty and the value of a brand’s reputation.
2. The imitation of the most successful product designs, technologies, and marketing strategies reduces product differentiation, making the various brands of different firms more directly competitive with one another. This homogenizing process is sometimes speeded up when product standards are set by government agencies or by respected independent testing agencies such as Underwriters Laboratories.
3. Buyers’ increased price sensitivity and the lower risk that accompanies production of a proven standardized product attract new competitors whose distinctive competence is efficient production and distribution of commodity products. These are often foreign competitors but may also be large domestic firms with years of experience producing or marketing similar products.

All three of these factors worked to reduce prices and margins for photocopiers during the early 1980s and for personal computers and peripherals during the 1990s, as those markets entered maturity.

Unless a firm can discover a marketing strategy that renews industry growth or a technological breakthrough that enables it to introduce a more differentiated product, it must simply learn to live with these new competitive pressures.¹² As we will discuss in Chapter 11 on competition, effective pricing in maturity focuses not on valiant efforts to buy market share but on making the most of whatever competitive advantages the firm has to sustain margins. Even before industry growth is exhausted and maturity sets in, a firm does well to seek out opportunities to improve its pricing effectiveness to maintain its profits in maturity, despite increased competition among firms and increased sophistication among buyers. Fertile ground for such opportunities lies in the following areas:

Pricing a Product in Market Decline

A downward trend in demand driven by customers adopting alternative solutions characterizes a market in decline. The effect of such trends on price depends on the difficulty the industry has in eliminating excess capacity. When production costs are largely variable, industry capacity tends to adjust quickly to declining demand and there will be little or no effect on prices. When production costs are fixed but easily redirected, the value of the fixed capital in other markets places a lower boundary on prices. When an industry’s production costs are largely fixed and sunk because capital is specialized to the particular market, the effects of market decline are more onerous. Firms in such industries face the prospect of a fatal cash hemorrhage if they cannot maintain a reasonable rate of capacity utilization. Consequently, each firm scrambles for business at the expense of its competitors by cutting prices. Unfortunately, since the price cuts rarely stimulate enough additional market demand to reverse the decline, the inevitable result is reduced profitability industry-wide. The goal of strategy in decline is not to win anything; for some it is to exit with minimum losses. For others the goal is simply to survive the decline with their competitive positions intact and perhaps strengthened by the experience.

Alternative Strategies in Decline

There are three general strategic approaches that can be adopted in a declining market: retrenchment, harvesting, or consolidation. In most declining markets, each of these strategies will be adopted by various competitors. The conventional camera market, which went into decline in the late 1990s and early 2000s, is a good case in point. A retrenchment strategy involves either partial or complete capitulation of some market segments to refocus resources on others where the firm has a stronger position. The firm deliberately forgoes market share but positions itself to be more profitable with the share it retains. Kodak adopted a retrenchment strategy in which it intentionally exited the broad conventional camera market while maintaining a position in the conventional disposable camera market as long as it remained viable.

Not all firms that forgo market share in a declining market do so as a deliberate strategic decision. Some are forced to sell out to satisfy creditors or for other reasons. Retrenchment, in contrast, is a carefully planned and executed strategy to put the firm in a more viable competitive position, not an immediate necessity to stave off collapse. The essence of a retrenchment strategy is liquidation of those assets and withdrawal from those markets that represent the weakest links in the firm’s competitive position, leaving it leaner but more defensible. In the case of Kodak, it leveraged its name recognition to sell inexpensive digital cameras that feed its Kodak Gallery, which extends the life of some of its traditional products such as prints and photographic paper. Given that capacity to make those products is sunk, the incremental revenue they represent is likely to be highly profitable.

In contrast to retrenchment, a harvesting strategy is a phased withdrawal from an industry. It begins like retrenchment with abandonment of the weakest links. However, the goal of harvesting is not a smaller, more defensible competitive position but to exit the industry entirely. The harvesting firm does not price to defend its remaining market share but rather to maximize its income. The harvesting firm may make short-term investments in the industry to keep its position from deteriorating too rapidly, but it avoids fundamental long-term investments, preferring instead to treat its competitive position in the declining market as a “cash cow” for funding more promising ventures in other markets. Polaroid was forced into a rapid harvesting strategy that ultimately led to the demise of the company in 2002 because it failed to respond to the emergence of digital photography technologies in time.

A consolidation strategy is an attempt to gain a stronger position in a declining industry. Such a strategy is viable only for a firm that begins the decline in a strong financial position, enabling it to weather the storm that forces its competitors to flee. A successful consolidation leaves a firm poised to profit after a shakeout, with a larger market share in a restructured, less-competitive industry. Consolidation is the approach adopted by Nikon and Canon that recognized that the high-end market for art photography is likely to remain viable for many years. Although most of their product development investments are focused on the growing digital market, they recognize that the art market is likely to remain viable for years and have restructured their business to enable them to continue to serve those markets profitably.

The lesson from the camera industry is that there are strategic choices that can improve even the worst phases of life cycles, but the choice is not arbitrary. It depends on a firm’s relative ability to pursue a strategy to successful completion, and it requires forethought and planning. For any of the strategic choices during the decline phase, timing, foresight, and creativity are crucial for successful implementation. It is crucial that companies in declining markets act decisively. The sooner managers face market realities, the more time they have to craft strategies appropriate for their firms.

Summary

The factors that influence pricing strategy change over the life of a product concept. The market defined by a product concept passes through four phases: development, growth, maturity, and decline. Briefly, the changes in the strategic environment over those phases are as follows: