mtm7 white paper product life cycle analysis

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Product Life Cycle AnalysisIntelligence Collaborative - Mastering the Methods Series

Product Life Cycle Analysis

This White Paper is #7 in a series of intelligence methods being offered to members of the Intelligence Collaborative. It was developed by Dr. Craig S. Fleisher to provide a concise overview of how to apply key intelligence methods to support analysis. Although every effort is made to ensure that the information is accurate and fit for its purpose, the author and Aurora WDC make no implied or explicit warranties as to its applicability or use in your particular work context.

Please direct any questions about this paper to its author at the following:Craig S. Fleisher, Ph.D.

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Abstract

The Product life cycle (PLC) analysis describes how the sales of a product evolves as a function of time. This model states that, similar to all living organisms, products pass through recognizable stages during their life: introduction, growth, maturity and decline. Taken together, these four stages provide a framework that recommends specific marketing strategies for each PLC stage in order to maximize profitability over the product’s life.

The Method’s Primary Value

The product life cycle provides an invaluable perspective to the development of both product and marketing strategies as each phase of the life cycle has distinct characteristics that affect a firm’s operation. Different strategies are often required through each stage as customer attitudes and needs, the number of competitors, and market forces change and evolve through the course of the product’s life cycle.

Overview of the Method

Life Cycle Length and Incubation Period

All products have a particular life span, which is called the product life cycle. The length of time a product is on the market is largely contingent upon its competition, technology and even the savvy of a company's marketing department. One of the best ways of extending a product's life cycle is to continuously garner feedback from consumers, finding out what they need and want from a particular product.

Sometimes, the life cycle concept applies to a brand or category of product. Fad items like Pet Rocks, Air Swimmers or planet registrations have a cycle lasting maybe only a few months (like before and up to the holiday giving season), but some categories, such as the hair brush, will be around for at least another century or two. During its incubation period, the product is developed and perfected. There are no sales during this preparatory period, but the manufacturer prepares for the product’s introduction into the marketplace.

Introduction Stage

After a company develops a product and tests its viability among consumers, the product is usually introduced to the market. This first part of a product's existence is called the introduction stage. A company is usually trying to build both advertising and brand awareness of the product in the introduction stage. Thus, advertising expenses are usually relatively high. Additionally, a company may adopt one of two pricing strategies with its product, according to quickmba.com. The first pricing strategy would be to enter the market with a high price in hopes of recouping initial production and



advertising costs. A company may also choose to charge a relatively low price for the product to build market share, which is the percent of unit or dollar sales a company holds in a particular market.

You can expect sales to be low while you perform introductory marketing to create awareness. Your primary goal during this stage is not to make a profit. Instead, you want to let customers know what your product does, and why it is special. Typically, you will introduce one product at a time, keeping the price either high for skim pricing – the most common – or low for penetration pricing. Initial distribution is selective, but broadens gradually based on your distribution plan. Early efforts focus on promotion and recognition. Until customers know about the product, they will not buy it.

Growth Stage

The growth stage is when product sales start to grow exponentially, especially when the product is one in high demand. At this stage, competition will grow as other companies develop competitive products. The market leader or first company in the industry to create the product will usually maintain its starting price as the price is obviously acceptable to consumers if sales are increasing.

The growth stage is all about increasing sales and gaining consumer loyalty. Competitors usually appear during the end of the growth phase. Increased advertising builds brand preferences. Continuing to roll out new product features, improvements or upgrades keeps your customers wanting more. If demand for your product remains high, you can respond by keeping the price at a high level or reducing the price to broaden your market share. Distribution should be intensive during this phase to get the product out to your entire consumer base.

Maturity Stage

Competition will eventually start reaching a saturation point over time. Companies will vie for a position in the market to compete with the bellwether or leading company. At this point, it will be difficult for new competitors to enter into the market. Some may even go out of business. Market saturation will eventually force companies to lower prices. It is during this stage that consumer research is extremely important. A company will want to determine what features, styles or flavors of the product in question consumers want so it can differentiate its product from competitors. A company may also discover that the consumers want additional or ancillary products. Hence, the company's best strategy is to extend its product line to include these additional products.

If your product survives the first two stages, it will spend the most time in this phase. During the maturity stage, you will seek to maintain market share and extend your product's life cycle. Tweaking your product to make it unique helps it stand out from competitors. Keeping an eye on the competition and pricing your product accordingly conserves market share, while avoiding price wars. Widen distribution and offer incentives to sellers to keep your product on the shelf. Finally, promoting brand loyalty and offering consumer incentives spurs customers to switch to your brand.



Decline Stage

Eventually, product sales will start declining unless a company finds new uses or markets for its product. The decline stage may be precipitated by new technology that replaces the outmoded product. For example, the computer eventually replaced the typewriter. The company may also cut back on advertising during the decline stage. For example, vinyl record albums are still in existence but are not promoted heavily except in aficionado circles/niches.

During the decline stage, demand for your product decreases along with both price and profit margin. Now, you have three choices: maintain the product and hope competitors do not, harvest the product and continue making profit as long as possible, or discontinue the product. Reducing the number of products, and refreshing the packaging can make them look new again. Lowering prices helps liquidate inventory, but if your product continues to serve a niche market, maintaining prices keeps profits coming in. Phasing out less successful distribution channels and focusing promotions on brand image for future products is a good strategy.

Where the Method Fits in Planning and Strategy

Determining Environmental Impact

A life cycle assessment allows a company to determine the environmental impact of a product. For example, a product that is manufactured using dangerous chemicals may require expensive disposal procedures when the product has reached the end of its life. By understanding the effect of the end of the life cycle, the manufacturer can work on manufacturing processes that reduce the danger to the environment and make the product safer to dispose of.

Resale Value

One of the financial benefits of a life cycle assessment is the ability to know the resale value of a product at various stages of its life. Part of a life cycle assessment is to collect as much pertinent data on a product at various stages of usefulness, and resale value is part of that data. The company can decide when an appropriate time would be to sell off a product after it has achieved its maximum return on investment.

Operating Costs

Operating costs vary depending on the product, and those costs can have an impact on your company's productivity and profitability. If you cannot afford to maintain your equipment properly, it will not operate at its maximum efficiency, and it is more likely to break down due to wear. A life cycle assessment allows you to plan for the expense of operating equipment at every stage of the product's life.



Upgrades

A life cycle assessment can help a company determine whether it is prudent to upgrade to a new product. If the current equipment is operating properly, and the life cycle assessment indicates that the company can get several more productive years from the equipment, it may be better to delay an upgrade of the product and invest the money elsewhere. If the equipment is reaching the end of its useful life cycle, then an upgrade can be considered.

Cautions with Applying this Method

Several implementation issues for PLC analysis present formidable challenges. For example, identifying product distinctions. Are you going to group products via product classes, product forms or product brands? These distinctions are often ambiguous, depend on significant amounts of seasoned judgment and will drastically impact the shape and implications of PLC analysis.

Another challenge is the difficulty of distinguishing within which stage a product currently sits. By defining markets too narrowly as a result of a product focus rather than a customer orientation, management often instigates market decline on its own accord.

As an analyst it is important that you take into consideration the flaws of PLC. These include:

• The bias in the PLC to view eventual decline of markets as a certainty. This leads to a self-fulfilling prophecy as the acceptance of maturity and decline fosters generalized strategies that reduce investment and often cause the market decline. Many successful and profitable firms are competing in low growth mature or declining markets.

• Generalized strategies do not adequately incorporate competitive market dynamics (e.g., differences between large and small firms, established versus new firms, original entry versus market entry through acquisition, licensing, joint venture, or by firms employing different strategies from the firm central to the PLC analysis).

• The PLC makes no concessions for the fact that, in an established industry, the developed infrastructure makes subsequent product introductions easier, delivering a much higher probability of success.

• Blind application of the PLC will usually endorse the bias towards a low-cost strategy and does not take into account the effects of experience. Additionally, the PLC theory gives short shrift to the strategic importance of maintaining technology, marketing and manufacturing process flexibility.



Applying the Method

There are several steps in executing the product life cycle analysis, including:

1. Estimating potential demand2. Determine price range3. Forecast sales for a range of possible prices4. Consider the risks associated with competitive price cuts5. Determine the fundamental marketing strategy for the growth stage6. Define the level of aggregation7. Forecast turning points8. Preparing modifications of the strategy for each of the PLC stages9. Remain vigilant about the appearance of a related, yet new, PLC

The following case study suggests how this analysis is employed to market and create success for a particular product type category.

Case Study: Applying the PLC to Analyzing the Retail Coffee Service Industry

The product life cycle comprises several distinct stages of product development characterized by rising and falling revenue. A life cycle can last weeks or years depending on the popularity of the product. The gourmet coffee industry is one such area where the popularity of the product with consumers extends its life cycle over many years. The coffee industry as whole brought in total sales in excess of $4 billion in 2011.

Introduction Stage

The introduction stage in a product's life cycle features low sales with high retail prices for goods, high advertising costs and very selective distribution across limited markets. In the modern gourmet coffee industry, the introduction stage occurred in the years before widespread gourmet coffee chains when consumers could only purchase specialty coffee drinks and artisan coffee varietals from specialty shops and independent coffee houses. The introduction stage in a product's life cycle is a period of low to negative profits due to the high costs of advertising and growing a customer base.

Coffee Growth Stage

Rapid increases in earnings characterize the growth period of a product or brand. Price can stay at its high level during this period if demand for the product remains high, or it can drop to capture more consumer attention. With gourmet coffee, the growth stage occurred during the late 1990s through the early 2000s, when chain coffee shops offering specialty coffee beverages appeared on every street corner across the United States seemingly overnight. According to Bellissimo, a specialty coffee advisory firm, the gourmet coffee industry expects solid growth until 2015, when the industry expects demand to peak.



Product Maturity Stage

While some industry experts believe the gourmet coffee industry is still in its growth stage, signs around the country indicate that gourmet coffee is in its maturity as far as product life cycle. The maturity stage of a product's life cycle features high brand awareness, wide distribution, lower prices to remain competitive and new product modifications to create brand distinctiveness. Consumers can see signs of product maturity in the rise of competing specialty coffee chains, all with distinctive brand features to cater to specific demographics within target market areas. For example, Dunkin' Donuts markets its coffee drinks to those consumers who feel out of place in hip coffee shops, while Starbucks continues to cater to young adults looking to cultivate "cool" images.

Decline Stage

At publication, gourmet coffee in the United States is far from declining, though new product offerings show that symptoms of decline could be on the horizon. Modern coffee makers enabling consumers to make single cups of coffee in just a few minutes provide new convenience while removing the need to wait in line for morning coffee. Fast food chains also have entered the gourmet coffee market, seeking to snatch consumers from established coffee companies by offering comparable specialty coffee beverages at lower fast food prices.

Complementary Methods

• Consumer adoption analysis• Customer value analysis (CVA) • Forecasting• Market analysis• Product portfolio analysis• Scenario analysis• STEEP (Macro-environmental) analysis• Substitution analysis

Additional Resources

See chapter 9 (pg. 147-160) on Product Life Cycle Analysis in the (2013) book Analysis without Paralysis: 12 Tools to Make Better Strategic Decisions, 2nd Ed., by Babette E. Bensoussan and Craig S. Fleisher, Upper Saddle River, NJ: FT Press.

Business and Competitive Analysis: Effective Application of New and Classic Methods by Craig S. Fleisher and Babette Bensoussan, 2007, Upper Saddle River, NJ: FT Press.

Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition by Craig S. Fleisher and Babette Bensoussan, 2003, Upper Saddle River, NJ: Pearson/Prentice Hall.



Anderson, CR and CP Zeithaml, “Stage of the Product Life Cycle, Business Strategy, and Business Performance,” Academy of Management Journal, March, 1984, vol. 27 no. 1, pp. 5-24.

Klepper, S. “Entry, exit, growth and innovation over the product life cycle,” The American Economic Review, Vol. 86, No. 3 (Jun., 1996), pp. 562-583.


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