In the textbook that I study, a disadvantage for market penetration pricing is given as follows:
“it is not suitable for products with a short product life cycle as there may not be enough time to recover from the initial low revenue”
How can a short product life cycle influence the revenues? If customers buy the product even when its price is increased, initial low revenues are recovered.
If the price is increased during the decline phase, then low revenues can’t be recovered, right? Because there is not sufficient amount of sales. So, the increase in prices is not related to how long product life cycle is. Even if product life cycle is very very long, initial low revenues won’t be recovered if the price is increased too late (for instance in decline phase).
So, it is useless to emphasize whether or not product has a short life cycle. What should be emphasized is the best timing. Price should be increased at the most appropriate point of time.
Am I missing something or the textbook’s phrasing/wording/reasoning is a little off the right path?
Is a “a short product life cycle” the same as a short shelf life? If I was trying to break into the cream cake market (a three day shelf life), I could undercut the competition for a while selling at a loss, in the expectation that customers would try them (because they are cheaper) and stick to them (because they are great cakes) when I put the price up.
Like you, I think that the premise does not hold true.
You’ve answered your own question, maybe without realizing it.
Introductory, loss-leader or “market penetration” pricing is only effective to get new sales from the market. Once you raise the price to the profitable level, you will get fewer new buyers among those who shop by price, but hopefully retain those who bought and liked/are accustomed to the product, as well as those who buy for non-price reasons (quality, word of mouth, etc.)
If the product life cycle is so short that it’s always in promotional pricing, you can never reach adequate sales levels at profitable pricing to make up the difference. You’re perpetually giving away the product at a small margin to keep rebuilding the market, which goes away when you change or update the product.
Don’t confuse “short life cycle” with “frequently updated.” Existing products that are “improved” build on the existing market. A truly short life-cycle product has to develop its market each time it is released in any new form.
The time interval for successful intro pricing depends a lot more on the type and scale of your marketing efforts than it does on your product’s life. So e.g. regardless of whether the product has a 3 month or a 3 year life cycle the marketing plan you can afford will still need intro pricing for 2-1/2 months to stimulate meaningful demand.
In the former case there’s no catching up for the lost revenue with just 1/2 month left of plausible sales volume before the product dies of old age. While in the latter case you’ve got 33-1/2 months to make up for the initial loss leading.
Of course the ideal way to promote a short-lived product is with a massive and fast-paced blast of marketing with an even more massive viral assist. That way you have 3 days of loss-leading, then everybody is hooked on your fad product at full price for 85 days until the next fad comes along 3 months later to displace you into oblivion.
But you can’t count on that happening. Hence the text’s final conclusion: all else equal with marketing efforts, the lifecycle profit of a longer-lived product will tolerate more loss-leading early than a short-lived product will.
I didn’t think the OP’s book was referring to perpetual promotional pricing.
I read it as saying that when you do market promotion pricing, you’ll be in the red for some period after the end of the promotional period, and that unless your prices are high enough, or your product life cycle is long enough, you may not make enough money back to push you into the black by the end of the cycle.
No. As I understand it, a “short product life cycle” refers to the lifespan of the product line, not of the individual items. So, for example, tickets to a concert that’s going to be held tomorrow night; or a new model of smartphone that’s going to be superseded by an even newer model in a month or two.
Pricing structures generally can’t be changed overnight. First, you are going to have substantial quantities of pre-marked inventory already at retailers (and very few distributors control their entire retail networks.) So for any product it might take, say, three weeks to increase prices. If you’re selling a backpack, that’s probably not an issue. If you’re selling 2015 Christmas cards, it probably will be.
No, I meant that was the effect. If a product (or variant) has an estimated sales life of six months, selling it at a discount for three months is foolish. If every iteration of the product is sold at a discount and there is never a sales period at full price that brings profits back up to a sustainable level, it’s essentially permanent discount pricing with no seller benefit.
When was the last time you saw any significant fraction of store inventory with a marked price - package-printed or sticker? That’s basically not done any more for a dozen reasons, rapid price adjustment and elimination of conflicting shelf prices being chief among them.
A few widgety things might come with “$29.95” printed on the box, but nearly all of those I’ve seen in recent years were somewhere between come-on and misdirection, making “sale” prices seem fabulous.
Sorry, that was poorly worded. I don’t mean pre-marked as in priced on the box. I mean that the retailer is contracted to sell that at price X, and has planned accordingly. They’re not going to give you extra warehouse space because you now want to sell at price Y (meaning they are now going to have to hold your product for much longer.)
I don’t think this corresponds too closely to retail marketing reality. It’s much more complex than that and most retailers don’t pick and choose products based on manufacturer marketing details. Certain selective, upscale things like designer clothing and jewelry, maybe, but your average grocery or discount store takes what it’s given and its buyers are more receiving agents than meta-shoppers.
Again, too simplified. Both parties twist each others’ dongs in this game. The major conglomerates tell the stores what to shelve and where, and if the stores don’t comply, they will find themselves on the short end of the stick on promotional pricing, availability of popular items and co-op advertising. It’s the small to midrange distributors that have to bargain for shelf space in between Kraft and P&G.
This topic doesn’t really lend itself to short discussion. The OP is talking about a textbook generality and I think it’s been answered: if a product has a short sales life, you don’t waste profits by discounting it for acceptance.