Question

What is life cycle pricing? Under what specific circumstances can it be most useful? What are some potential problems with using this approach to pricing?

Answer 1

- What is Life Cycle Pricing: life cycle pricing or Life cycle costing can be defined as the cost over their life time, the best use of physical asset at the lowest cost of entity. A product’s life cycle is its progress from when it is created to when it is discontinued. There are four stages in the cycle, which are development, growth, maturity, and decline. The product life cycle helps business owners manage sales, determine prices, predict profitability, and compete with other businesses.

Product life cycle management, or PLM, is the process of observing a product throughout its life cycle.

-Usefulness of Life Cycle Pricing: Life Cycle Pricing (LCP) can most useful-

a. as a planning tool, it characterizes the marketing challenges in each stage and it possess major alternative strategies.

b. as a control tool, the LCP concept allows the company to measure product performance against similar product launched in past.

c. LCP is expected to support selection of all building systems that impact energy use: thermal envelope, passive solar features, domestic hot water, building automation and lighting etc.

-There are some potential problems with using this approach to pricing which are described as below:

a. Fluctuations in sales data – One major problem in the Product life cycle is that the graph is completely dependent on sales data. Thus if there are fluctuations in the sales data, then the graph is useless and cannot be used to predict precisely the movement of products or the overall product rise and decline. Such fluctuations can arise due to production issues, seasonal sales of the product or due to any other reason.

b. Delay in sales data – Another limitation for the product life cycle is that there is delay in collecting and analysing the sales data.

c. Varying market conditions – There may be a variance in the sales data due to varying market conditions. Therefore products which are hit in one place, might not be hit in other regions or territories due to the differences in consumption patterns of those territories.

d. Effect of other elements – There are various other elements which effect the product life cycle. Product itself is just one P amongst the 4 P’s of marketing and there are three other elements such as Price, Place, promotions or even people and packaging. Overall Marketing, Logistics, Price etc have an effect on the sales of the product and hence the stages and their length in the PLC might vary based on these elements.