Controller Library Value Pack
CFO Library Value Pack

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    Thursday
    Apr302015

    The product life cycle

    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:

    1. 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
    2. 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
    3. 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
    4. 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 life span of less than one year.