The Product Life Cycle
An important theory that business schools teach is the life cycle of products and services. A new product, like an organism, needs to go through a sequence of tests to indicate its vitality in a market.
Products and services go through these four stages of the cycle: introduction, growth, maturity, & decline.
This is the stage that all products and services have to go through to. Here is where a firm is researching the ins and outs of the market and its demographics. Costs can vary in this stage depending on the product and the size of the market. Essentially this stage should give you an idea on the value of the product or service you’re trying to introduce in the market.
After proving demand for a product and introducing it to the market your branding and quality level is established, and intellectual property protection such as patents and trademarks are obtained.
Here is when the product needs to be competitive, whether through price cuts or product differentiation, such as a why.
Either a concept (product or service) survives and thrives this stage or is quickly eliminated.
Challenges of the Introduction Stage:
- Small or no market: When a new product is launched, there is typically no market for it, or if a market does exist it is likely to be very small. Naturally this means that sales are going to be low to start off with. There will be occasions where a great new product or fantastic marketing campaign will create such a buzz that sales take off straight away, but these are generally special cases, and it often takes time and effort before most products achieve this kind of momentum
- High costs: Very few products are created without some research and development, and once they are created, many manufacturers will need to invest in marketing and promotion in order to achieve the kind of demand that will make their new product a success. Both of these can cost a lot of money, and in the case of some markets these costs could run into many millions of dollars.
- Losses, Not Profits: With all the costs of getting a new product to market, most companies will see negative profits for part of the Initial Stage of the product life cycle, although the amount and duration of these negative profits does differ from one market to another. Some manufacturers could start showing a profit quite quickly, while for companies in other sectors it could take years.
Benefits of the Introduction Stage:
- Limited competition: If the product is truly original and a business is the first to manufacture and market it, the lack of direct competition would be a distinct advantage. Being first could help an organisation to capture a large market share before other companies start launching competing products, and in some instances can enable a business’s brand name to become synonymous with the whole range of products, like Walkman, Biro, Tannoy and Hoover.
- High Price: Manufacturers that are launching a new product are often able to charge prices that are significantly above what will eventually become the average market price. This is because early adopters are prepared to pay this higher price to get their hands on the latest products, and it allows the company to recoup some of the costs of developing and launching the product. In some situations however, manufacturers might do the exact opposite and offer relatively low prices, in order to stimulate the demand.
The growth stage is typically characterized by a strong growth in sales and profits, and because the company can start to benefit from economies of scale in production, the profit margins, as well as the overall amount of profit, will increase. This makes it possible for businesses to invest more money in the promotional activity to maximize the potential of this growth stage.
Challenges of the Growth Stage:
- Increasing Competition: When a company is the first one to introduce a product into the market, they have the benefit of little or no competition. However, when the demand for their product starts to increase, and the company moves into the Growth phase of the product life cycle, they are likely to face increased competition as new manufacturers look to benefit from a new, developing market.
- Lower Prices: During the Introduction stage, companies can very often charge early adopters a premium price for a new product. However, in response to the growing number of competitors that are likely to enter the market during the Growth phase, manufacturers may have to lower their prices in order to achieve the desired increase in sales.
- Different Marketing Approach: Marketing campaigns during the Introduction stage tend to benefit from all the buzz and hype that surrounds the launch of a new product. But once the product becomes established and is no longer ‘new’, a more sophisticated marketing approach is likely to be needed in order to make the most of the growth potential of this phase.
Benefits of the Growth Stage:
- Costs are Reduced: With new product development and marketing, the Introduction stage is usually the most costly phase of a product’s life cycle. In contrast, the Growth stage can be the most profitable part of the whole cycle for a manufacturer. As production increases to meet demand, manufacturers are able to reduce their costs through economies of scale, and established routes to market will also become a lot more efficient.
- Greater Consumer Awareness: During the Growth phase more and more consumers will become aware of the new product. This means that the size of the market will start to increase and there will be a greater demand for the product; all of which leads to the relatively sharp increase in sales that is characteristic of the Growth stage.
- Increase in Profits: With lower costs and a significant increase in sales, most manufacturers will see an increase in profits during the Growth stage, both in terms of the overall amount of profit they make and the profit margin on each product they sell.
During the maturity stage, the product is established and the aim for the manufacturer is now to maintain the market share they have built up. This is probably the most competitive time for most products and businesses need to invest wisely in any marketing they undertake. They also need to consider any product modifications or improvements to the production process which might give them a competitive advantage.
- Sales Volumes Peak: After the steady increase in sales during the Growth stage, the market starts to become saturated as there are fewer new customers. The majority of the consumers who are ever going to purchase the product have already done so.
- Decreasing Market Share: Another characteristic of the Maturity stage is the large volume of manufacturers who are all competing for a share of the market. With this stage of the product life cycle often seeing the highest levels of competition, it becomes increasingly challenging for companies to maintain their market share.
- Profits Start to Decrease: While this stage may be when the market as a whole makes the most profit, it is often the part of the product life cycle where a lot of manufacturers can start to see their profits decrease. Profits will have to be shared amongst all of the competitors in the market, and with sales likely to peak during this stage, any manufacturer that loses market share, and experiences a fall in sales, is likely to see a subsequent fall in profits. This decrease in profits could be compounded by the falling prices that are often seen when the sheer number of competitors forces some of them to try attracting more customers by competing on price.
- Continued Reduction in Costs: Just as economies of scale in the Growth stage helped to reduce costs, developments in production can lead to more efficient ways to manufacture high volumes of a particular product, helping to lower costs even further.
- Increased Market Share Through Differentiation: While the market may reach saturation during the Maturity stage, manufacturers might be able to grow their market share and increase profits in other ways. Through the use of innovative marketing campaigns and by offering more diverse product features, companies can actually improve their market share through differentiation and there are plenty of product life cycle examples of businesses being able to achieve this.
Eventually, the market for a product will start to shrink, and this is what’s known as the decline stage. This shrinkage could be due to the market becoming saturated (i.e. all the customers who will buy the product have already purchased it), or because the consumers are switching to a different type of product. While this decline may be inevitable, it may still be possible for companies to make some profit by switching to less-expensive production methods and cheaper markets.
- Market in Decline: During this final phase of the product life cycle, the market for a product will start to decline. Consumers will typically stop buying this product in favour of something newer and better, and there’s generally not much a manufacturer will be able to do to prevent this.
- Falling Sales and Profits: As a result of the declining market, sales will start to fall, and the overall profit that is available to the manufacturers in the market will start to decrease. One way for companies to slow this fall in sales and profits is to try and increase their market share which, while challenging enough during the Maturity stage of the cycle, can be even harder when a market is in decline.
- Product Withdrawal: Ultimately, for a lot of manufacturers it could get to a point where they are no longer making a profit from their product. As there may be no way to reverse this decline, the only option many business will have is to withdraw their product before it starts to lose them money.
- Cheaper Production: Even during the Decline stage, there may be opportunities for some companies to continue selling their products at a profit, if they are able to reduce their costs. By looking at alternative manufacturing options, using different techniques, or moving production to another location, a business may be able to extend the profitable life of a product.
- Cheaper Markets: For some manufacturers, another way to continue making a profit from a product during the Decline stage may be to look to new, cheaper markets for sales. In the past, the profit potential from these markets may not have justified the investment need to enter them, but companies often see things differently when the only other alternative might be to withdraw a product altogether.
Understanding the theoretical life cycle of products/services will give structure to an entrepreneur trying to understand how and where its value proposition fits in a market.
Example of a life cycle (introduction, growth, maturity, & decline.):
- Holographic Projection: Only recently introduced into the market, holographic projection technology allows consumers to turn any flat surface into a touchscreen interface. With a huge investment in research and development, and high prices that will only appeal to early adopters, this is another good example of the first stage of the cycle.
- Tablet PCs: There are a growing number of tablet PCs for consumers to choose from, as this product passes through the Growth stage of the cycle and more competitors start to come into a market that really developed after the launch of Apple’s iPad.
- Laptops: Laptop computers have been around for a number of years, but more advanced components, as well as diverse features that appeal to different segments of the market, will help to sustain this product as it passes through the Maturity stage.
- Typewriters: Typewriters, and even electronic word processors, have very limited functionality. With consumers demanding a lot more from the electronic equipment they buy, typewriters are a product that is passing through the final stage of the product life cycle.