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 growth Market 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)