In the late 1990s, the world’s three major independent producers of hard-disk drives invested about $6.5 billion in research and development in the course of just four years. During the next decade, the bytes that can be stored per unit of a drive’s surface area increased a thousandfold—while the price per unit of that surface area dropped 70 percent. The three companies created enormous value for customers. Yet their failure to price products correctly throughout this period of significant innovation contributed to net losses totaling almost $800 million.
Entire industries can suffer when companies fail to grasp the importance of pricing products or services across the life cycle, particularly in innovation-intensive sectors such as consumer electronics and consumer durables, IT hardware and software, medical devices, and pharmaceuticals. That’s especially true today. Companies introduce products more regularly, with life cycles often measured in months, not years. There’s external pressure for low prices from customers expecting more for less and internal pressure from the belief that pricing is a make-or-break factor when products launch. And a company may have a number of related products in the marketplace simultaneously, which complicates their life cycle pricing.
Two points are essential to price effectively throughout the life of a product or service. First, companies should actively manage the trade-off between price and volume (or profit and market share) to maximize returns. Most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in a market, a price move for one can have important implications for others.
With these two principles in mind, companies should consider how they respond to pricing challenges during the three major phases in the life cycle of a product or service: launch, midlife, and late life.