The Product Life Cycle..
Shows the different stages in the life of the product and the sales that can be expected at each stage.
There are six stages which most products pass through...
During the development stage...
- Suitable ideas must be investigated, developed and tested
- If an idea seems worthwhile, then a prototype may be produced
- After all this a decision is made about whether or not to launch the product
- A large number of products never progress past this stage and will fail because businesses often avoid taking risks with new products
- Costs are high at this stage, as there are no sales or revenue being generated.
During the introduction stage...
- The product is launched
- Pricing will either be high (skimming) in order to cover development/promotion costs, or low (penetration) in order to gain market share and brand loyalty.
- There will be high levels of promotion to raise awareness, which will come at a high cost
- Distribution costs may be high, as new production lines will have to be created.
- Few outlets will stock the product at this stage
- The length of this stage varies from product to product. Technological products may be slow, as consumers may need to persuaded they actually 'work.' Whereas, items such as fashion products may sell much quicker.
During the growth stage...
- Sales begin to grow rapidly, new customers buy the product and develop brand loyalty.
- Costs may fall as production increases (purchasing economies of scale)
- The product starts to become profitable
- If it is a new product, and there is a rapid growth in sales, some competitors may launch their own versions, which may lead to a slowdown of the rise in sales.
- Prices may be changed at this stage, high prices may be lowered and low prices may be raised slightly
- Promotion may be increased to encourage brand loyalty, or to appeal to new markets.
During the maturity/saturation stage...
- Sales will peak at this point
- The product will be established and have a stable market share
- Competitors will have entered the market in order to take advantage of potential profits.
- As more firms enter the market it will become saturated, forcing some businesses out of the market, as too many firms will be competing for customers.
- During this stage extension strategies may be used in order to extend the life of the product.
During the decline stage...
- For the majority of products, sales will eventually decline. This is usually due to changing consumer tastes, new technology or the introduction of new products.
- The product will lose its appeal to customers
- At some stage it will be withdrawn or sold to another business
- It may still be possible to make a profit if high prices are charged and little is spent on promotion or other costs.
Products where there is a very short period between introduction and decline.
- The slope of the product life cycle in the introduction and growth period will be very steep and the decline very sharp
- Examples include: Heelies, Pokemon cards and Micropets.
When consumers lose interest in a product, and sales start to fall..
- A business may withdraw it from the market, sometimes poor selling products are withdrawn to prevent them damaging the image of the company.
- It may be replaced with another new product
However, businesses must take care not to withdraw a product too early..
Over time, certain products have became popular again.
- For example: skateboards, which were popular in the 1980s regained popularity in the mid-1990s and the early 2000s.
Some product life cycles never reach decline...
Some businesses still enjoy profits from products which were launched many years ago.
E.g. The Oxo cube and Kellogg's cornflakes, which have been around since the early 1900s.
These products still sell well today, and haven't changed much since the original was released.
For some products, life cycles are getting shorter...
- This is most common in areas such as electronics and technology.
- In the computer industry, some models and software have became obsolete within a very short period as newer versions are created which are more advanced.
- One example is Windows: Windows 95, Windows 98, Windows 2000, Windows Xp, Windows Vista etc.
Methods used to extend the life of a product, once it has reached the maturity stage.
The most common extension strategies consist of...
- Finding new markets for existing products. (In recent years, sales of 'sports' clothing has increased as it is seen as fashionable)
- Developing a wider product range. (Lucozade was once a drink used to recover from illness, now they have different ranges such as 'sport,' and cola.)
- Gearing the product towards specific target markets (banks now have accounts for younger people)
- Changing the appearance, format or packaging. (Coca-Cola can be bought in cans, in glass or plastic bottles, or in multi-packs.)
- Encouraging people to use products more often ('breakfast cereals' are now encouraged at any time during the day.)
- Changing the ingredients or components ('low fat meals,' cars with built in MP3 players.)
- Updating designs
Capacity utilisation is..
the extent to which a business uses the capacity that it has to produce a particular product.
It is the relationship between what a business actually produces, and what it is capable of producing.
Ways of measuring capacity utilisation..
- A business working at full capacity, which is unable to produce any more of a product will be at maximum capacity utilisation.
- A business that can still produce more with its existing technology and machinery is likely to be working at less than full capacity.
The product life cycle is linked to capacity utilisation..
- At launch, sales of a product are likely to be limited. So a business will have spare capacity.
- When a product is at its growth stage a business will often be expanding its production and using up spare capacity to meet the rising demand for the product.
- When a product is in its maturity stage a business may be operating at full capacity. If sales continue to grow it must decide whether to invest to expand capacity.
- In the decline stage the capacity that a business has to produce a product will often be underutilised. This is because sales and therefore production may be cut back.
During these stages, a business will have to make decisions over its capacity.
A business may decide to build new capacity to deal with the sales of a product...
New capacity could be created as sales grow:
- This would delay outflows of cash until they were needed.
- There would also be less risk that the new capacity would be greater than sales
- But, if the sales were higher than expected, the business may find it difficult to invest quickly enough to prevent shortages.
Alternatively, new capacity could be created before sales take place.
- But this carries the risk that the investment would be wasted if sales did not grow in line with expectations.
- The cash to pay for the investment would flow out of the business earlier.
- Average costs would be higher too, because the cost of creating and running spare capacity at launch would have to be paid for.
- However, it would be easier to deal with unexpectedly high sales than if invest took place when sales actually happened.
A business may also decide to utlilise existing capacity...
- There is less risk if a business uses existing capacity.
- If a business is operating at less than full capacity, it could use the spare capacity to launch a new product. This help reduce cash outflow associated with new products.
- Or a business may be working at full capacity, but have products which are at the end of their life cycle. These could be taken out of production and replaced by the new lines.
- A problem with this approach is that the average costs of production, excluding the cost of any investment, may be higher than if new capacity had been built. (new machinery is more efficient, and cheaper to run.)
The product life cycle and cash flow...
- During the development stage, money will be spent, but no money will be made from sales. So, cashflow will be negative.
- At launch, cash flowing out of the business is still likely to be more than that flowing in, so cash flow will be negative. Sales have yet to take off, and a business may be spending on promotion.
- In the growth period, eventually revenue from the product will be greater than spending and so cash flow becomes positive. This is because sales will be increasing and average costs may be falling as output increases.
- In the maturity stage cash flow will be at its highest. The product will be earning its greatest revenue.
- In the decline stage, sales will fall and so cash flow will decline.
Why might a business be interested in analysing the product life cycle of its existing products or anticipating the life cycle of new products?
- It will illustrate the different trends in revenue that a product might earn for the business.
- It will identify when a business may want to launch new products, as older ones are in decline
- It will identify points where extension strategies may need to be used
- It may help a business to identify when and where spending is required (e.g. on research and development at the start, or on marketing at the introduction and when extension strategies are required.)
- It may help to identify points at which a business should no longer sell a product
- It will help a business to manage its product portfolio - its mix of products.
- It will give an indication of the profitability of a product at each stage of the cycle.
- It will allow a business to plan different styles of marketing that a product might need over its life cycle.
However, there may also be problems with using this model...
- It may not be entirely accurate in predicting the future of the product's life cycle. In practice, every product is likely to have a different life cycle.
- The model does not determine decisions. A product in the decline stage, doesn't have to be automatically withdrawn. Sales may be falling due to lack of promotion or poor distribution. The decline in sales may be more to do with management decisions than where the product is in its cycle.