11.4 Life Cycle Costing and Pricing

Life cycle costing and pricing are crucial for strategic decision-making. This approach considers a product's entire lifespan, from development to decline, helping companies make informed choices about costs, pricing, and long-term profitability.

Understanding product life cycle stages and their pricing strategies is key. By applying life cycle costing, businesses can better manage expenses, set competitive prices, and maximize profits throughout a product's journey in the market.

Product Life Cycle Stages and Pricing

Stages of Product Life Cycle and Their Characteristics

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• Product life cycle encompasses four distinct stages products go through from introduction to decline
• Introduction stage marks the product's initial entry into the market with low sales and high marketing costs
• Growth stage features rapidly increasing sales and market acceptance, attracting competitors
• Maturity stage exhibits slowing sales growth, intense competition, and focus on product differentiation
• Decline stage shows decreasing sales and profitability as newer products enter the market

Pricing Strategies for Different Life Cycle Stages

• Introduction stage pricing often employs skimming or penetration strategies to establish market position
  • Skimming pricing sets high initial prices to recover development costs quickly (luxury cars)
  • Penetration pricing uses low prices to gain market share rapidly (streaming services)
• Growth stage pricing focuses on maintaining or increasing market share while maximizing profits
  • Competitive pricing becomes crucial as more players enter the market
  • Price adjustments may be necessary to respond to competitor actions
• Maturity stage pricing strategies aim to maintain market share and profitability
  • Value-based pricing becomes important to differentiate from competitors
  • Promotional pricing may be used to stimulate demand (seasonal discounts)
• Decline stage pricing often involves lowering prices to maintain sales volume
  • Harvesting strategy maximizes short-term profits before product discontinuation
  • Revitalization attempts may include repricing to target new market segments

Life Cycle Costing

Understanding Life Cycle Costing Concept

• Life cycle costing calculates the total cost of ownership over a product's entire lifespan
• Encompasses all costs from initial concept through disposal or decommissioning
• Provides a comprehensive view of product profitability and cost management
• Helps in making informed decisions about product development, pricing, and long-term strategies
• Considers both internal costs to the company and external costs to customers and society

Components of Life Cycle Costs

• Research and development costs include expenses incurred before product launch
  • Concept development and feasibility studies
  • Prototype creation and testing
  • Patent and intellectual property protection
• Production and manufacturing costs cover expenses during the product's active life
  • Raw materials and component procurement
  • Labor costs for manufacturing and assembly
  • Quality control and inspection processes
• Marketing and distribution costs involve expenses to bring the product to market
  • Advertising and promotional campaigns
  • Sales force training and support
  • Distribution network setup and maintenance

Total Cost of Ownership and Its Importance

• Total cost of ownership extends beyond the initial purchase price
• Includes ongoing costs such as maintenance, repairs, and operational expenses
• Considers disposal or recycling costs at the end of the product's life
• Helps customers make informed purchasing decisions by revealing long-term costs
• Enables companies to design products with lower lifetime costs, increasing competitiveness
• Supports sustainability efforts by encouraging the development of more efficient and durable products