Capturing Value Through Late Lifecycle Pricing

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My father-in-law was in the U.S. Navy and served as an engine room machinist on the USS Farragut in the late 60’s. Recently, there was a new destroyer commissioned as the USS Farragut, and when we had the opportunity to take a private tour, we took advantage of it. While on the ship’s bridge, we noticed some electronics that seemed fairly out of date. The officer that took us on the tour mentioned that it takes eight years to build the ship, and by the time the ship is completed and ready for service, many of the electronics can become outdated. In fact, some of the electronics may not even work properly due to old age and have to be replaced before the ship is even commissioned. He mentioned that replacing these electronics can sometimes cost five to ten times the original price, as they are often obsolete products. That got me thinking… how should products nearing their end-of-life be treated in regards to pricing?

For products nearing their end-of-life, it is good practice to understand:

• The degree to which your customers are locked-in to the product (the Navy is very locked-in to their electronics to drive consistency across ships).
• The potential impact a price increase has on future sales of the end-of-life product and replacement products, and how this might affect your business’ inventory of excess and obsolete products.
• Relative strength in the marketplace for the given product(s).
• Overall product and service strategy. Do you capture value on end-of-life products through increase in service prices?
• How product cost is changing, since demand usually declines as products near their end-of-life.

Developing an understanding of these concepts against your products can help you understand how much more value you can capture out of your products nearing their end-of-life. Like the electronics manufacturers that supply the U.S. Navy, you too could potentially improve your revenues and profits by capturing price improvements on older products.