The product life cycle refers to the different stages that a product passes through over time. The concept is used to set pricing, product revision, and marketing strategies for a product.
The product life cycle is comprised of the following four phases:
Introduction Phase – In this phase, a business is trying to build market acceptance for a new product. This has the following effects:
- Making significant marketing expenditures to establish a brand
- Pursuing early adopters, who can then influence others to buy
- Pricing can be set high to skim off profits before competitors enter the market, or set low to deter others from entering
- Since the company is uncertain of success, it is more likely to minimize risks by outsourcing high-investment production work
- There is a strong cash outflow, as the company is making large expenditures to support the product
Growth Phase – In this phase, the company builds market share to maximize sales of the product. This has the following effects:
- Additional versions of the product are released, along with adjacent spin-off products and the build-out of a complete product line
- Marketing is expanded to ensure that all possible customers are reached
- The product is sold through a large number of distribution channels
- As long as customer acceptance is strong, price points are held or even increased
- There can still be a cash outflow since the company is investing in more fixed assets and working capital to support the expansion of sales
Maturity Phase – In this phase, there are many competitors, so the primary task is to defend market share. This has the following effects:
- There is a close analysis of how each product variation matches up against competing products, resulting in products that have differentiating features
- There is ongoing, downward pressure on prices, which can result in the imposition of a target costing program to design lower-cost products
- Coupon and other discount deals may be offered to spur demand from customers
- A maintenance level of marketing expenditures is used to ensure that customers are aware of the product offerings
- There is an increased focus on cost reduction throughout the product line
- Cash flows can be strongly positive since there is no longer a growth phase that would otherwise require more working capital
Decline Phase – In this phase, product sales gradually decline, leading to the eventual termination of the product. This has the following effects:
- Reduce costs to the greatest extent possible in order to preserve positive cash flows
- Gradually withdraw the product from some distribution channels, focusing on those remaining niches where the product still generates a profit
- Conduct an orderly product termination, selling off excess inventory and shutting down production lines in the most cost-effective manner
This concept can be applied to a single product or to an entire product line.
The duration of the product life cycle depends on the market. In some cases, a product may last for decades, while other products may have a lifespan of less than one year.
