Product life cycle and its concept

Product life cycle and its concept All products and services have certain life cycles. The life cycle of a product, also known as PLC, is a model that illustrates the six different stages that a product/service will go through. The PLC shows the life of a product from its conception to its final withdrawal and each phase has its own characteristics and varies in length depending on the product/service. When a company introduces a new product in the market is very important to identify the six stages of its products life cycle because it has to take specific marketing actions in each stage in order to have the more profits it can. The understanding of the PLC can help the businesses to find out the right timing to introduce or withdraw a product from the market and realize whether their products are successful or not. THE HISTORY OF THE PRODUCT LIFE CYCLE AND ITS CONCEPT The product life cycle concept was developed in the 1950s and became very popular during the next decade. Up until now, it represents a core element of marketing theory and it is widely accepted because of its extensive applications. The PLCs concept can be applied to other theories such as new product development, portfolio analysis etc. The concept of PLC involves that: All products and services have a limited life similar to the human life (or the life of any other living organism). The product sales range. They pass through several and unique stages which pose certain challenges, opportunities and problems. The profits of a product/service range also. During different stages the profits are bound to rise or fall accordingly. Finally, at each stage of PLC, the firms must alter their strategies and their marketing in order for their product to be as profitable as it can. The product life cycle and its stages refer to three production levels: As far as it concerns a specific product (brand) of a company (e.g. Samsung captivate Galaxy S cell phone). A specific company that produces similar and parallel products (e.g. Samsung cell phones). And the whole industry. The group of companies that produce competitive products (e.g. the whole cell phone industry). The brands usually have shorter product life cycles. The products on the other hand, follow standard PLC, while the product categories (industries) have the largest PLCs and stay in maturity phase for a long time, sometimes indefinitely. THE PLC STAGES The products life cycle consists of six phases: Development Introduction Growth Maturity Saturation Decline Fig.1 3821925.gif PRODUCT DEVELOPMENT PHASE The development phase begins when a company generates and develops a new product idea. Its a process that demands the translation of different kinds of information (market and consumers trends, competitors products, environmental analysis etc.) which will have to be organized, combined and incorporated into the new product. This product must pass several test market and laboratory tests (Beta testing) in order for the company to see if it will be profitable and if the customers will benefit from it. Only those products that survive the tests can be introduced into the real market. Its obvious that during the development stage the company does not have any sales or profit. INTRODUCTION PHASE The introduction phase begins with the launch of the product in the market. The company tries to promote the new product, develop a market for it and spends a great deal of money in order to achieve this. During this phase the sales generally are low and the profits of the company even tend to be sometimes negative (low sales, high unit costs). The companies produce a small amount of products and their employees must be highly educated. Expertise is needed now. There is little or no competition and there may be high skim pricing for the company to recover the development costs. Finally, the distribution is very selective until the consumers start showing acceptance of the product and start buying it. Sadly, most of the times, the new products fail this stage and the company must withdraw them early from the market. GROWTH PHASE The products that managed to pass the first two stages with flying colors can now proceed to the growth stage. Thats the most profitable stage for the firms. The product takes-off in the market place and the sales increase rapidly. Costs decline on a per unit basis and we have scale economies in production. Thats the time that the company wants to increase the market share and find loyal customers (brand loyalty). However, the success of the product draws the competitors attention. The pricing, which would have be maintained with little competition, starts changing. The company must now become the leader, indicate all the products offerings and differentiate the brand from those of competitors. Basically, the companies during this phase try to find sources of competitive advantage and establish position in the market. The promotion continues as well, but not in the same extend that was needed in the second phase and is also aimed at a broader audience. Finally, distribution channels are added since the product is now successful and the demand continues to increase. MATURITY PHASE Its the stage where the sales have reached to their maximum point (peak) and now start decreasing. The strong growth in sales diminishes and the competition becomes harsher. Now there is a plethora of similar products in the market and the first basic product becomes less wanted. However, if the company managed to achieve its market share goal, now is the time to enjoy the most profitable period. The maturity stage is a period that the firms try to extend their products life as we will show further down. During this stage, pricing strategies change and usually the companies lower their prices because of the new competition. Price wars start. Discounts, coupons, BOGOF offers etc. give an advantage to those who are leaders, helping them to withstand the crisis caused by the low prices. Promotion changes and focuses in finding new buyers. Emphasis is given to the product differentiation especially in terms of quality, use, reliability and price. The distribution becomes more intensive and the use of multi distribution channels begins. The phase of the maturity is a period that drives many companies to stop the production and withdraw (shake-out) since they cannot handle the competition. Its a phase that lasts for a long time and includes the majority of products (mature products of mature industries). SATURATION PHASE This phase usually is excluded because it has many characteristics of the maturity phase. However, the saturation stage is even more extreme. During this stage, sales are impossible to increase and the profits decline sharply. The competition becomes more and more austere and relentless and the customers now search for the low cost substitutes. Meanwhile, the quality of the similar products gradually rises and the previously new product straggles to keep up and not fade away. DECLINE PHASE This is the final stage. In the decline phase sales decrease rapidly either because new products are launched in the market or the buyers behavior starts to change. Its the time that the companies start to withdraw their products, minimize the promotion and lessen the distribution channels. Sometimes, the firms continue to sell their products in a lower price to their loyal customers but that cannot continue for a long time since ultimately the costs will exceed the profits. At this phase the firm has several options such as: To maintain the product by adding new features or by finding new uses of it (extension strategies). Sell the product to another company which is willing to continue the production. This is called divestment and basically refers to companies that want to associate the dying product with their production line or sell it to a different market. Harvest the product. With this option, the companies reduce costs and offer the product until they run out of stock. Most of the times the product is sold to the loyal customers who already know the product and the places where they can acquire it. The group of these loyal customers is also called Niche segment. Withdraw the product. (Sometimes this becomes a 7th phase called the abandonment phase). Fig.2productLifeCycle.gif Fig.3product_life_cycle-2-797072.gif Fig.4 (a PLC compared to the companys profits) product_lifecycle.jpg In the table bellow there is a summary of the strategies that the companies must follow in each product life cycle phase. The table has been taken from the book Strategic Industrial Marketing Development Phase Introduction Phase Growth Phase Maturity Phase Decline Phase Strategic Goal Make your product known and establish a test period Acquire a strong market position Maintain your market position and build on Defend market position from competitors and improve your product Milk all remaining profits from product Competition Almost not there Early entry of aggressive competitors into the market Price and distribution channel pressure Establishment of competitive environment Some competitors are already withdrawing from market Product Limited number of variations Introduction of product variations and models Improvement upgrade of product Price decrease Variations and models that are not profitable are withdrawn Price Goal High sale to middle men Aggressive price policy (decrease) for sales increase Re-estimation of price policy Defensive price policy Maintain price level for small profit Promotion Goal Creation of public market product awareness Reinforcement of product awareness and preference Reinforcement of middle men Maintain loyal to middle men Gradual decrease Distribution Goal Exclusive and selective distribution trough certain distribution channels and creation of high profit margins for middle men General and reinforced distribution through all distribution channels available General and reinforced distribution with good supply to the middle men but with low margins of profit for them General and reinforced distribution with good supply to the middle men but with low margins of profit for them Withdrawal from most channels of distribution except those used in development phase Source: Avlonitis G. THE DIVERSITY OF PRODUCT LIFE CYCLES Beside the usual and common product life cycle that we have just analyzed, there are some special categories. They are usually called alternative Product Life Cycles and appear very different PLC patterns. As the majority of products go through the normal six stages of their PLC, there are many that do not or will not follow them. These special categories of PLC are mainly five: the style, the fashion, the fad, the low learning and the high learning. However other PLC patterns are also the instant bust, the aborted introduction, the market specialty, the growth stump -maturity pattern, the cycle recycle pattern, the scalloped pattern etc. STYLE Style is a basic and distinctive model of expression appearing in a field of human endeavor. Once a style is invented it can last for generations Examples of Style appear in clothes, home art etc. FASHION Fashion is a currently accepted and popular style in a given field. It passes through four stages. The stage of distinctiveness, where some buyers approve something new and innovative that will characterize them. The stage of emulation, where other buyers approve this fashion in order to imitate the fashion leaders. The stage of mass fashion, where fashion becomes very popular and companies start producing in large quantities (mass production). The stage of decline, where the customers live behind the particular fashion and begin heading towards a new one. FAD Fads are fashions that rapidly appear to the consumers. They become accepted with great enthusiasm, peak early and decline very fast. Their acceptance cycle is very short and products that we will come across in this category are the tattoos or the body piercings. HIGH LEARNING PRODUCTS High learning products are products which have very long introductory phases. After their appearance in the market, they need time in order to become accepted either because they are complicated (require significant education of the customer) and expensive or simply because they are not compatible with the existing values of the society (e.g. Video phones, microwave ovens etc.). LOW LEARNING PRODUCTS Low learning products are the exact contrary of the high learning ones. Their introduction is very fast and some time it is difficult to separate the introductory and the growth stage. They peak rapidly because of their high relative advantage. The customer already knows how to use them and understands the benefits of having them. ALTERNATIVE PRODUCT LIFE CYCLES As we have already mentioned, there are also other product life cycles which do not exhibit a bell shaped PLC. Growth slump maturity pattern Its a pattern that usually comes up in new drugs. At the beginning, the products success leads to a high sale level but later slumps. After that point the sales fall to petrified level (other examples are the kitchen supplies like spoons, mixers, kitchen knives etc.). Cycle recycle pattern Cycle-recycle pattern often suits in the pharmaceutical industry. At start, the firm aggressively promotes the product. As a result sales grow producing the first cycle. After their peak, sales start declining and the firms give another promotion push in order to have other smaller growths which produce a second, third cycle and so on. The Scalloped pattern The scalloped pattern on the other hand, differs from the other two. Here sales go through a series of PLCs. This succession of life cycles is the result of good marketing. The company finds new uses of the product, discovers new future customers and sometimes the launches the product to new foreign markets. A great scalloped pattern example would be again a certain drug which company found new applications of it. Other Other alternative Product Life Cycles would be the Instant Bust, the Aborted Introduction, The Market Specialty and the Extended Life Cycle which is the most common type and we are going to analyze next. EXTENDING PLC EXTENSION STRATEGIES The life cycle of the products varies, as we have already mentioned, but sooner or later all products will eventually reach the maturity stage which will be followed by the decline stage. Since the most profitable period of the PLC is during the stages of growth and maturity, companies pay strong attention on the life cycle of their products and try hard to extend them especially as those life cycles near an end. This kind of extension can be achieved by operating certain strategies which usually are introduced during the maturity phase. The most usual and effective PLC extension strategies are the following: Re-Packaging Re-Branding Pricing Re-Designing Promotion New Markets RE-PACKAGING Re-packaging the product means basically that you alter the image of a mature product. The companies try to give a new image to their products in order to make them look more appealing to their existing customers and/or attract new customers. This slight alteration can be done by changing the materials, the size or the messaging on the package. Take for example a chocolate that a company has been selling for decades. Though the product was popular in the 1970s, the new generations will not buy it because is not as modern as they would like it to be. However, if the company changes it just a bit, then it can reach out to those people who will start buying it. RE-BRANDING Re-branding a product is a difficult extension strategy because the companies must change the packaging, the name and the total appearance of their product. This strategy is usually followed when the company wants to reach out to a different audience, target a different market. Take for instance a shampoo. The firm must consistently offer improved versions of this product to maintain the interest of its customers. Re-branding this product would mean giving it a fresh look and name and can involve developing comparative ads that explain how the product has changed and is now better than ever before. PRICING A widely used extension strategy is the re-designing of the products pricing strategy. This can be done by either reducing the products existing price, discounting, or by offering different pricing options. By using this technique, the companies reach out to target markets that couldnt afford the product, gain customers and sustain market share for the products that they offer. RE-DESIGNING Re-designing a mature product is actually the modification of the products features. This strategy is usually followed when the product must adapt to market changes or changes in buyers preferences (customers behavior). In order to do so, the companies, can change the color, the shape or the decoration of the product depending on what their target groups want. Additionally, the companies can add new features to a product providing alternative uses for it. These modifications must be noticeable to the buyer and satisfy his needs in a better way than before, or satisfy him in more ways. Finally, there are two types of value adding modifications: The retention type modification that increases the attractiveness of a product/service to the loyal customers of the company. The conquesting type modifications that allow a company to attract another companys loyal customers by increasing the appeal of its product/service to them. PROMOTION Promotion is used for every single product no matter the stage they are in. However when a product nears the end of its life cycle, the company tends to increase the advertising in order to increase awareness and remind customers the benefits of purchasing this product. The marketing departments can develop new advertising campaigns or stick to the old ones but increase the frequency of the ads. By using persuasive promotional techniques such as BOGOF (Buy One, Get One Free), companies try to stimulate demand. NEW MARKETS Companies can always expand abroad and launch in new markets. By expanding their products abroad, they can reach out to completely different customers (numerous cultural, social, political or geographical differences) and extend the PLC. This strategy can be very expensive since the market will be new and unknown, however, if its done properly, the product will be very profitable and wont fade away. To sum up, if the above product life extension strategies are done properly and be successful, then they can increase the profitable period of a product, generating additional profit from a mature or declining product. THE PROBLEMS OF PLC MODEL As mentioned above the standard PLC model is not followed by each and every product/service. In spite of the companies efforts, sometimes the poor marketing or the misunderstanding of the environments and the consumers messages can lead a product straight to the decline stage. Usually, the firms cannot predict the time that their product will need to go from one phase to another and sometimes they cannot even realize their products current stage. All these ultimately will lead the firm to take marketing actions too early or too late. Since every product is bound to spend different lengths of time in each stage there is no physical way of showing this on the PLC model. As Day (1981: 65) points out: The identification of the boundaries between phases will be affected by the variety of product life cycles patterns. The more variations of the PLC identified, the more difficult the positioning process becomes. Through the years, several scientists and authors have criticized the PLC model and have questioned its validity. In the table below we present some of those along with the problems that they found in this extraordinary model. Major criticisms and problems Authors The PLC concept has no practical use Levitt (1963: 93) It is still difficult to determine at which phase of the PLC a product or service is Levitt (1963: 93) Dhalla and Yuspeh (1976: 102-110) Grantham (1997: 9) The PLC concept has not yet been tested systematically Polli and Cook (1969: 385-400) The PLC led many companies to make costly mistakes and to neglect opportunities. It is often difficult to accurately determine in which phase of the PLC a product actually is. Shortcomings on the practical application of the PLC concept Dhalla and Yuspeh (1976: 102-110) There is still no evidence of the efficacy of the PLC as a tool to predict marketing strategy Dhalla and Yuspeh (1976: 102-110) Grantham (1997: 9) Most empirical studies testing the product life cycle concept have found that it lacks validity or usefulness for explaining sales growth Weber (1976: 125-132) The problem with the PLC concept is that sales are modeled primarily as a function of time and are expected to produce curves that display growth, leveling and decline Tellis and Crawford (1981: 125-132) In many markets the product or brand life cycle is longer than the actual planning life cycle or organizations Mercer (1993: 269-274) There is still serious doubt about the application of the product life cycle as a marketing tool Grantham (1997: 4) THE INVERTED PRODUCT LIFE CYCLE The inverted product life cycle was first invented by John A. Weber. Its a new framework that provides new aspects for viewing and understanding the possible growth opportunities for the organization. It is nothing more than the classic PLC concept. However, this inverse expands it into a detailed, inquisitive and intuitive tool for planning future growth. According to Weber the inverted product life cycle will help organizations to estimate the sales likely to result from taking advantage of available growth opportunities. The inverted PLC uses the industrys life cycle and not the products itself. It can be used in plenty ways such as to help the top management and the product line managers, assess alternative growth choices and international markets, separate the market segments etc. PRODUCT CANNIBALISM Product cannibalism is a phenomenon that appears when a company launches a new product, similar to other pre-existing ones, regardless of their market position. This is mostly due to the introduction of new technologies in the market, which makes cannibalism common among technologically advanced companies. When a firm decides to follow this strategy, it launches a new product to replace previews ones, which cannibalizes on the market share of its predecessors. The favorable case of cannibalism Product cannibalization has both a negative and a positive side. In a usual case of cannibalism, the improved product is introduced to the market when the older one reaches its peak sales. Prices for the new product are high, in order to sustain profit, as the previous version reaches the end of its life cycle. Sometimes, companies introduce a new product, before the existing one even reaches its maturity phase. It is important, for managers, to know exactly the right moment to introduce the new product, as mistimed actions can be catastrophic. The unfavorable case of cannibalism If cannibalism is implicated without caution, the results might be harmful for the company. These are: Smaller contribution to profit, as the new product sold at a lower price, does not yield as much profit as the previous one and does not expand the companys market share. Switching to a new product causes smaller combined profits from both products, compared to not cannibalizing. Changes in the manufacturing process may be too expensive to handle and cause a decrease in profit. A new product with higher risk may cause an unexpected rise in production cost and a decrease in profit margin. Offensive and Defensive Cannibalism strategies Product cannibalism can be used in order to hit the market leader, or repel competitive companies from stealing market share. Offensive cannibalism is useful when a company wishes to establish itself in a new market or expand its market share. For the market leader it is advisable not to cannibalize, until it is necessary. Companies should wait for the right moment, when they have developed or acquired technology allowing them to develop an innovative product. When competitors arise, they will be ready to quickly launch their new product, not only sustaining their market share, but increasing it as well as gaining larger profit. This is not always the case, as delays give competitors the opportunity to attack market share, before the leader is able to react. Defensive cannibalism strategies include: Cannibalizing before competitors, using proper timing. Early use of this strategy causes profits to drop, while late use causes a loss in market share. Using product cannibalism as a way to maintain a technological advantage over competitors. The market leader adjusts the length of the products life cycle this way. This is the case with Intel corp. cannibalizing its older processors in favor of new ones. Adjusting the cannibalization rate to pricing. The price of a new product determines the mix in sales between new and old. Giving the new product at a lower price causes cannibalization to be slow. In the opposite case, cannibalization becomes fast, as the new product is considered to be superior to the previous one. Minimizing cannibalization with the introduction of a new product to specific market segments. This strategy helps the company to maintain a balance between gain and loss in the market. Cannibalism and e-commerce Cannibalism is also common among companies that operate on the internet. Their strategy is to offer products at a lower price on the internet, compared to retail prices. Since buyers are affected by prices they choose to buy online, causing a reduction in volume for retail sales. Large companies such as Toys R Us (United States of America), have launched online ventures in order to achieve this result. THE PLC AND PRODUCT PORTFOLIO THE BCG MODEL Bruce Henderson of the Boston Consulting Group (BCG) has developed a matrix called BCG matrix. The BCG matrix is a portfolio planning model which is used to identify products, current and future market position, profitability, capital requirements and development opportunity. The BCG matrix is based on the theory of product life cycle and it is a well-known portfolio management tool. The BCG matrix is often used to know which products in company gets more funding and attention. Each product has its product life cycle and each phase in the product life cycle represents a different profile of risk and return. A company should retain a balanced portfolio of products that includes both high growth and low growth products. The high growth product is a new product that has to get to the market and it takes a lot of effort to get it there. The high growth products are those which are expected to bring the most profit in the future. A low growth product is already established and known by th e market. In other words these products are the milking cows that brings a constant cash flow. It is important for the companies to know what phase their products are in and in order to find this out they can use the BCG matrix. The model has four categories in a portfolio of a company. These four phases are: Star. If a product is placed in the category of stars it has a high growth and a high market share. The products are also those which are the leaders in the business but still they need to retain the market share with a lot of marketing and promotions. If the company manages to keep the market share the stars will grow into cash cows. The most important thing for a star product is to maintain the strong market position to later develop into a cash cow and try to avoid moving to a dog. Cash cow. When a product has reached a high market share in a mature market it becomes a cash cow. It is characterized by a low growth but a high market share. Due to the high market share there is no reason to invest on the product. A cash cow generates a lot of cash flow because of the high profit margins. This phase of the product life cycle is what every business strives for. Question mark. This phase of the products life cycle exists when the product enters the market and is waiting for the buyers to discover it. The strategy is to get the customer use the products. It is about a high growth and a low market share therefore question marks have high demands and low returns due to the low market share. If the managers do not manage to increase their market share these products will become dogs. When a product reaches this phase the company has to decide if they want to invest in it or to sell it. Dog. When a product has reached the low growth limit and when it has a low market share it is time for the company to remove the product from the market because expensive turn around plans do not help. One possibility the company has is to focus on a defensible niche. Generally, dogs should be avoided and minimized. These four steps of the BCG model can be compared to the model of the product life cycle. When the product life cycle is compared to the product portfolio concept, the marketing manager can take strategic decisions with greater certainty. We can compare the question mark phase to the introduction phase. When the product has evolved to become a star it has reached out to the market and also managed to get a strong market position. This can be compared to the phase of growth. After the period as a star the product turns to a cash cow which is also the maturity stage. Finally a declining product can also be called a dog. CONCLUSION The product life cycle model has been a central and crucial element of marketing theory for four decades. It has been helpful to marketers in their attempt to understand, conceive and analyze their products success and profitability and has proved itself to be an important research tool. Despite the criticism that it has received and the g