The Product Life Cycle Model

The product life cycle analysis is a technique used to plot the progress of a product through its
life span. The model can be used to assess an individual firm's products (e.g. the iPod Classic), a
type of product (e.g. CRT televisions) or an industry (e.g. movies).
Different variations of the model can show between four and six stages. Here, we show four
stages:

Typical characteristics of these stages are set out in the following table:

Strategy implications of life cycle analysis

Life-cycle curves can be useful devices for explaining the relationships among sales and profit
attributes of separate products, collections of products in a business, and collections of
businesses in a conglomerate or holding company. Life-cycle analysis has been suggested by
some of its advocates as a basis for selecting appropriate strategy characteristics at all levels. It
also may be viewed as a guide for business level strategy implementation since it helps in
selection of functional level strategies.

Introductory phase
Demand will be low when a product is first launched onto the market, and heavy advertising
expenditure will usually be required to bring it to consumers attention. The aim is to establish
the product in the market, which means achieving a certain critical mass within a certain period
of time. The critical mass is the sales volume that must be achieved in order to make the product
viable in the medium term. Depending on the nature of the product, a price penetration (low
entry price) policy may be adopted in order to reach the critical mass quickly. On the other hand
the market may be skimmed (exploiting those purchasers keen to have the latest product such as
plasma screen TVs) and so a high introductory price may be set.

Growth
Once the hurdle of the introductory stage has been successfully negotiated, the product enters the
growth stage, where demand shows a steady and often rapid increase. The cost per unit falls

because of economies of scale with the greater level of production. The aim at this stage is to
establish a large market share and to perhaps become the market leader. Market share is easier to
obtain during the growth stage because the market is growing and increased market share does
not have to be gained by taking sales from another company. In a more mature market, market
share has to be poached from competitors and their reaction may be unpleasant as they try to
hold on to their market share. During the growth stage competitors will enter the market, some of
which will not survive into the maturity stage. Despite the fact that competing products will be
launched into the growing market and pricing is often keen in order to gain market share, it is
usually the most profitable stage for the initial supplier.

Maturity
The increase in demand slows down in this stage, as the product reaches the mass market. The
sales curve flattens out and eventually begins to fall. As market maturity is reached the
organization becomes more interested in minimizing elasticity. Products have to be differentiated
in order to maintain their position in the market and new users for mature products need to be
found to keep demand high. Generally, profits will be lower than during the growth stage.

Decline
When the market reaches saturation point, the products sales curve begins to decline. When the
market declines price wars erupt as organizations with products which have elastic demand seek
to maintain full utilization of their production capacity.
Profits can still be made during the early part of this stage, and the products will be managed to
generate cash for newer products. This will determine how prices are set. Eventually rapidly
falling sales inevitably result in losses for all suppliers who stay in the market. This particular
product has effectively come to the end of its life cycle, and alternative investment opportunities
must be pursued.
Despite the recent general tendency to shorter life cycles, the length of any particular stage
within the cycle and the total length of the life cycle itself will depend on the type of product or
service being marketed. Although the curve will be characterized by a sustained rise, followed by
leveling out and falling away, the precise shape of the curve can vary considerably. Life cycles
are discussed further later in this text.

Cost changes during the life cycle

As a product moves through its life cycle it is likely to find that the nature, value and importance
of each of it costs will change.
Every product will be different, but a typical pattern might be:

Every product will be different and there is no hard and fast rule as to what will happen to
product costs. So the above table is simply an illustration of what would 'typically' happen to a
product's costs over its life cycle.
If we look at 'competition costs' as an example. Competition costs represent element such as the
cost of matching competitor prices or offers, the cost of matching their services, or the cost of
competing for resources such as staff and materials that become scarce when competitors enter
the market.
In the early stages of product development and introduction these costs should be non-existent (if
competition do not yet exist) or low (as competitors enter the market). In the growth phase they
will start to rise though not yet to high levels as there should be less need to compete for existing
customers as there should be plenty of new customers to attract in order to meet goals. But when
the market matures then these costs can be high as customers become more discerning, it is
difficult to find replacement customers for any that are lost, and rivals look for new ways to gain
a competitive advantage.
In the decline phase these costs might actually ease off. The business might take a deliberate
decision to 'harvest' the product and compete less aggressively, or competitors might themselves

realize that further costs here creates a 'lose-lose' situation, or price stability arises, or
competitors leave the market - there are many justifications for a fall in competition costs at this
stage.
Some firms now try to incorporate lifecycle costing into their pricing decisions.

Pricing strategies
There are many different pricing strategies, and it may come as a surprise to would-be
accountants that cost is only one of many methods and is certainly not universally used as the
key method for pricing.
Premium pricing
Premium pricing is pricing above competition on a permanent basis. This can only be done if the
product appears different and superior to competition, which normally means establishing a
brand name based on one of the following:
Quality
Image/style
Reliability/robustness
Durability
After-sales service
Extended warranties.
In order to establish a brand, heavy initial promotion is required and the name must be constantly
advertised or promoted thereafter. Brand names, such as, Levi, Mars, Coca-Cola, etc., require
many millions of pounds spent on them each year. The benefit is a higher selling price generating
a larger profit per unit and customer loyalty, making the product relatively price inelastic. These
benefits must, of course, outweigh the cost of keeping the brand name in front of the customers.
Market skimming
Skimming is a technique where a high price is set for the product initially, so that only those who
are desperately keen on the product will buy it. Then the price is lowered, making the product
more accessible. When the next group of customers has had a chance to buy at that price, the
price is lowered again, and so on. The aim of this strategy is usually to maximize revenue. But,
on occasions, it is also used to prolong the life of older products.
Consumer durable companies tend to skim the market. This is done, to a certain extent,

to recover large research and development costs quite quickly. But the products also lend
themselves to this treatment as trend-setters are willing to pay a high price to own the latest
gismo, and the rest of the population follow their example in later years. Books are also sold this
way, with new novels published in hardback at a high price. The hard cover costs little more than
a soft cover. Avid readers of that author will buy the hardback book at the high price. A year or so
later the book is reissued with a soft cover at a much cheaper price in order to reach a wider
audience.
Price skimming was probably first employed at the end of the eighteenth century by Josiah
Wedgwood, the famous ceramics manufacturer. He made classical-shaped vases decorated with
sprigs of decoration, which he sold to the rich and well-to-do. Naturally he priced his products
accordingly. As the designs became old and well known he reduced the price on those lines and
introduced new designs at the high price. Thus, he created different tiers of markets for his
products, and people who were not so well off could afford a piece which had been in production
for some years. This marketing technique helps to prolong a products life and extracts the
maximum profit from it.
If demand for a new or innovative product is relatively inelastic the supplier has the chance of
adopting a market skimming price strategy. It is usually much easier to reduce prices than
increase them, so it is better to begin with a high price, and lower it if demand appears more
elastic than anticipated. If profitable skimming is to be sustained beyond the introductory phase,
there must be significant barriers to entry to the market, in order to deter too many potential
competitors entering attracted by the high prices and returns.
In the case of books only one company own the rights to publish. Wedgwood had created an
Image/brand among the rich and famous which others could not copy, especially if they wished
to undercut his prices. Consumer durable products have high manufacturing costs that deter too
many companies entering the industry.
Penetration pricing
Penetration pricing occurs when a company sets a very low price for the new product initially.
The price will usually be below total cost. The aim of the low price is to establish a large market
share quickly by encouraging customers to try the product and then to repeat buy. This type of
tactic is used, therefore, where barriers to entry are low. It is hoped to establish a dominant
market position, which will prevent new entrants coming into the market because they could not
establish a critical mass easily with prices so low.
In the past, companies used penetration pricing when they introduced a new product, such as a
new spray polish, through supermarkets. The price would be, say, between 60 per cent and 80 per
cent of the ultimate price. Customers would buy the new product largely because of its price and,
it was hoped, repeat buy either because they did not notice the price increase or because they did
not mind paying for a good product. If customers do notice the price increase they are likely to
be put off further purchases if the increase is too large. If a company succeeds with this type of
pricing it wins a large market share very quickly which competitors will find hard to break into.

Price differentiation
If the market can be split into different segments, each quite separate from the others and with its
own individual demand function, it is possible to sell the same product to different customers at
different prices. Marketing techniques can be employed to create market segmentation, if natural
demarcation lines are not already in existence. Segmentation will usually be on the basis of one
or more of the following:

time (e.g. rail travel is cheaper off-peak, hotel accommodation, telecommunications);

quantity (e.g. small orders at a premium, bulk orders at a discount);
type of customer (e.g. student and OAP rates);
outlet/function (e.g. different prices for wholesaler, retailer, end consumer);
geographical location (e.g. stalls and upper circle, urban and rural sites, wealthy and poor
districts, different countries);
Product content (e.g. sporty versions of a small car).

This type of pricing is of particular use where a service provider (theatre, leisure centre, train
operator) has a high proportion of fixed costs. By attracting those willing and able to use the
service at the less popular time/location will help to improve profitability.