Life Cycle, Value & Segmentation

Product Introduction

• Price too high – no growth

• Price too low – limited profit

• Who are initial adopters

• Education the key

• Price-quality effect

How to get adoption

• Sampling (cheap and frequent purchases)

• Education

• Incentives for distribution channel

Growth

• Penetration – Cost advantage– Winner take all market– Price sensitive customer base

• Skimming– Quality– Niche– Barriers needed

• Neutral

Issues during growthMarket Characteristics

• Does market want specialization or low cost?

• Price sensitivity

• Long term development of market – Timing– Size

Issues during growth

Strategy Issues• Segmentation?

– Can you?– Do customers value? – Willingness to pay for quality

• The structure of costs.– Economies of scale– Cost advantage– Fixed vs Variable Cost

• Firm’s financial position

Maturity

• Competitive advantage– Needed for survival– Cost– Differentiation

• Imitation– Proven Market– Clone the Best– Saturation Issues

Maturity techniques

• Unbundling - selective competition where competition is the most intense.

• Better metrics (what works and what doesn’t?)• Cost control to increase margins• Selectively dropping unprofitable products• Product line extension - leverage successful

products.• Streamline distribution (for cost effectiveness)

Value Based Pricing:Techniques

• Quid-pro-quo – price tied to value• Sell quality• Selective participation (some business is too

costly)• Set pattern of fixed prices (cuts transactions

cost)• Compensate sales force for profit not vol.• “Temporary” price concessions (intro…)• Use non-price closers (especially for sales force)

CAREFUL!

• Be explicit about service support & costs

• Use marginal analysis when evaluating offers

• Long run impact vs short term pricing

• Make contracts two way (I give, you give)

• Beware of locking in price when value is changing.

Steps

• Determine value (customer specific)

• Choose markets that are cost effective

• Evaluate the deal carefully

• Must be cost effective– For firm– For customer

• WINNER’S CURSE

Segmentation

• 1. Separable markets• 2. Different price elasticities

• Lower price (for volume) in elastic market• Raise price (for margin) in inelastic• Equalize Marginal revenue across markets

• Need review of price discrimination??

Separation

• Information (AAA, AARP, coupons, financial condition for college students)

• Location (region, roaming charges, freight charges)

• Time of purchase (long distance rates, periodic sales, now vs later)

• Peak Load Pricing (interruptible power, long distance rates)

• Yield management (airlines)

Using Volume

• Volume (size of order vs monthly volume)

• Order discounts (cost based discount)

• Step discounts (reap part of consumer surplus)

• Two part pricing (utilities’ connect fee)

Techniques

• Product Design (make different markets’ products incompatible)

• Bundling (diff. cust. - diff attribute values => add to benefit--McDonalds)

• Optional bundling – force customer into marginal cost analysis (cruise packages)

• Value added bundling (add-ons—housing, cars)• Tie-ins (two related markets with different

elasticities—printers and cartridges)• Metering (a way of measuring value provided)