Pricing in the Decline Phase

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From the course by University of Virginia

Market and Competition in Pricing Strategy

60 оценки

University of Virginia

Market and Competition in Pricing Strategy

60 оценки

Course 3 of 4 in the Specialization Pricing Strategy Optimization

If you haven’t considered what the competition is charging, you may not be maximizing your revenue. Spend time analyzing the market and you can influence price and improve margins. In this course, we'll show you how to implement competitive pricing and avoid common legal pitfalls of market-based pricing. You will also learn how to predict, influence and respond to competitors’ pricing moves. Led by Darden faculty and Boston Consulting Group global pricing experts, this course provides an in-depth understanding of market-based pricing and how to use it to capture more revenue.

From the lesson

Disrupting Markets and Engaging in "Coopetition"

Disrupting competition and engaging in "coopetition" can benefit all players in the market--but not all the time. Using knowledge from game theory and pricing models can help you understand when this strategy can be beneficial. Thomas will introduce two competitor pricing models--price moves and price wars--and show you how to use these models to predict and respond to competitors. Then Ron will show you various strategies to optimize prices through the four phases of the product life cycle, from disruptive to declining products. Then you will use the SmartOps case to apply your knowledge of "coopetition" to analyze a real-world pricing decision.

Pricing through the Product Life Cycle6:24

Pricing in the Growth Phase3:37

Pricing in the Maturity Phase6:25

Pricing in the Decline Phase5:23

Case Introduction: SmartOps2:33

Case Debrief: SmartOps1:09

Week 3 Takeaways1:03

Meet the Instructors

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice

Well, finally I want to talk to you about the Market Decline Phase.

It's the fourth phase of the product life cycle.

It's not necessarily the phase you look forward to.

But it happens and you need to know how to deal with it.

What often happens in this phase is declining demand

leads to excess capacity, right?

All of these companies have these productive assets.

They've been making product for this market but the demand has gone down.

So some of those productive assets are sitting idle.

Now what do you do about it?

It depends somewhat on your cost structure.

So let's think about this a little bit.

If your costs are largely variable, then your capital can be reallocated.

What do I mean by variable cost?

That means most of your costs are actually in the physical product itself,

maybe the ingredients of the product, for example.

Look at that box of hush puppies.

Doesn't that look good?

Yeah, well, that's a product, mainly that's variable cost.

The cost of a hush puppy is things like the cornmeal and

the spices that go into the hush puppy.

Now, the same productive assets that make hush puppies can probably be used for

other things, like making breading for chicken.

So if you think you're in a market like the hush puppy market that's in decline,

what you can do is take some of those assets out of hush puppy production and

put them in chicken breading production or some other opportunity that you have.

That'll work if your costs are variable.

Now, what if your costs are rigid?

Well, what do I mean by that?

It means that you have a lot of assets that are good for just one thing.

Think about making jet aircraft.

Well, those are very specialized machines, right?

You can't make jet aircraft and turn around and

use those productive assets to make hush puppies.

That will not work.

So what do you do when you have these very specific assets and

you can't really repurpose?

Well, you know price competition is going to increase.

It might be time to retrench, harvest or find new uses.

Now what do I mean by retrench, harvest or find new uses?

Well, retrenchment means you might withdraw from the weakest segment of

the market.

Maybe if it was in the airframe market, the example I was showing you before,

there are certain small jets you would just decide,

you're not going to make because the small jets just aren't profitable.

But you're going to price to defend the remaining segments.

So you may withdraw from some, but then price aggressively in others.

Retrenchment happened with Kodak, all right?

They were in the market for film.

What happened with that market?

Well, digital technology took over and

it really put into decline the normal standard kind of film market.

What did they do?

Well, they still makes some film but they've largely retrenched, they've got

out of that market because it is just doesn't make sense for them anymore.

Now harvesting, what does that mean?

Here's the bottom line with harvesting.

It means pricing to maximize returns today.

Don't worry about tomorrow.

Don't worry about building your brand.

Don't worry about investing in your assets, or your brand assets or

your marketing.

Just make money today.

In fact, there's a whole industry out there in finance.

These funds that buy up brands and

companies that are in the declining phases.

And what do they do?

They take them and they just maximize their returns.

They make as much money as they can with them today,

really until they go out of business.

You can then use the resulting income to fund new products in new markets.

You're not going to grow that market, but you may be able to grow other markets.

Think about mayonnaise.

I mean, are you really going to grow the mayonnaise market?

No, what you should do in the mayonnaise market is make as much money as you

can in the mayonnaise market.

Then Unilever, who owns Hellmann's,

can take the capital out of Hellman's, not reinvest in a lot of branding,

take that capital out and develop new products, new ideas to bring to market.

Finally, you can find new uses.

Sometimes this is hard but you should try.

A famous example of this is Arm & Hammer baking soda.

This is a very old brand in a very old market.

And you know what happened with them?

People weren't just baking as much anymore.

So it's bad to be in the baking soda business

when people aren't baking very much anymore.

What did they do?

They found a new use, an important new use.

They started running commercials saying if you put Arm & Hammer baking soda

in your refrigerator, it will absorb the moisture and

the scent, kind of the stench of the refrigerator.

That really appealed to people.

They found a brand new market.

So, instead of being in a declining market, they were really in

the development stage of a new market that they themselves had created.

So what do we think about here?

What are the key takeaways?

Think carefully about where your product is in the lifecycle.

Be honest and realistic about it.

And then use the tactics we presented here to price accordingly.

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