3.2. The product life cycle Uses of the product life cycle

The product life cycle concept is based on the analogy with living things, in that they all have a finite life. All products would be expected to have a finite life, whether it be long or short. The life cycle can operate at an individual product level, or a product type, or at a product class level, where arguably a market life cycle would be a more appropriate title. At individual product level, the product life cycle is a useful tool in product planning, so that a balance of products is kept in various stages of the life cycle.

At the product class level, we can use the product life cycle concept to analyse and predict competitive conditions and identify key issues for management. It is conventionally broken down into a number of stages as shown in Figure 3.1.

S

Growth

Maturity

ales

Decline

Introduction

Time

Figure 3.1. The product life cycle The introduction stage

The introduction stage follows the product’s development. It is consequently new to the market and will be bought by ‘innovators’ – a term used to describe a small proportion of the eventual market. The innovators may not be easy to identity in advance and there are likely to be high launch and marketing costs. Because production volumes are likely to be low (because it is still at a ‘pilot’ stage), the production cost per unit will be high.

The price elasticity of demand will strongly influence whether the product is introduced at a high ‘skimming’ price or a low ‘penetra­tion’ price. Price skimming is appropriate when the product is known to have a price inelastic demand such as with new pharmaceuticals or defence equipment. Penetration is appropriate for products with a pure elastic demand and when gaining market share is more impor­tant than making a fast recovery of development costs.

‘Pioneer’ companies (those who are first to the market with a par­ticular product) are usually forced to sell the product idea in addition to an existing brand, and the early promotion may help competitors who enter the market later with ‘me too’ versions of the product idea.

Entering the market at an early stage is usually risky. Not only will the company be incurring a negative cash flow for a period, but also many products fail at this stage. Against this risk is the prospect of increas­ing market share in the new product area faster than the ‘me toos’, such that the first product may become the industry standard in future years.

The growth stage

During the growth stage, sales for the market as a whole increase and new competitors typically enter to challenge the pioneer for some of the market share. The competitors may develop new market segments in an attempt to avoid direct competition with the established pio­neering market leader.

The market becomes profitable and funds can be used to offset the development and launch costs. This is an important time to win mar­ket share since it is easier to win a disproportionate share of new customers than to get customers to switch brands later on. As new market segments emerge, key decisions will need to be made as to whether to follow them or stay with the original. It has been shown (Brown, 1991) that, in the electronic calculator market for example, demand was initially concentrated among scientists and engineers. Then businesses starting using them, then university students and finally the market reached its height when demand was found among schoolchildren. A pioneer wishing to stay in all these markets would have to make the brave decision to move out of organization-to-organization business into a mass consumer market.