Products, like people and animals, tend to proceed through a series of stages taking a product from development to withdrawal, or retirement, from the market. Understanding the Product Life Cycle (PLC) can help product and engineering managers make better decisions for both manufacturing and marketing. Furthermore, the PLC is a key concept tested on both the New Product Development Professional (NPDP) and Professional Engineering Manager (PEM) exams. The NPDP exam categorizes PLC understanding in the newest section of knowledge in Life Cycle Management and Sustainability, while the PEM exam include PLC information in Section 7 – Marketing and Sales Management in Engineering Organizations.
What is the PLC?
Traditionally, the product life cycle includes four stages:
- Maturity, and
At each stage, an organization is faced with different strategic decisions and challenges. Responses to these challenges can help a firm maximize profits as a product moves from its infancy to withdrawal from the market.
Launching a new product can be very expensive. New product development (NPD) includes costs to design and test the product or service. Markets are small or non-existent at this point in time so firms must spend significant amounts of money to develop a brand and its promotional materials. And, there is no guarantee – regardless of focus group testing, surveys, and other market research – that potential customers will actually buy the new product after it is launched.
Likewise, as costs are high, profits tend to be low. Because the market is small and new, manufacturing costs tend to be high also. Per unit production costs include recovery of the development expenses. Additional start-up costs for launching a new product typically include large capital expenses to acquire equipment and to develop the distribution channels.
On the other hand, prices can often be set a higher level than throughout the product’s average lifetime. Early adopters are anxious to purchase the new product to solve their problems. So, these customers are willing to pay whatever price necessary to acquire an effective solution. Moreover, these early adopters also provide a useful pool of information to refine the new product with added features and benefits as it continues to move through its life cycle.
The second phase in the PLC is the growth stage. In this stage, companies tend to realize the highest profits. The overall market is growing s more customers begin to purchase and use the product, so sales increase and likewise, as the firm increases productivity, the manufacturing costs decline and profits improve in response to economies of scale.
Challenges during the growth stage are primarily related to increased competition. Once the new product has launched and early adopters have accepted it as a desired solution to a problem, more and more consumers seek to purchase the product. Manufacturers then recognize the product as a viable solution to consumer issues and also begin offer similar products for sale. As competition increases, prices will decline. However, profits can remain high as firms take advantage of the emerging economies of scale and as the overall market is growing in number and volume.
Organizations should begin a strategic investigation of the product’s life cycle at this stage in order to differentiate themselves. Products can be differentiated through additional features, services, or a unique business model approach. Firms should focus on establishing their brand as the category standard. For example, we say “Kleenex” when we need facial tissue and “Xerox” when we mean photocopy.
A primary focus for companies in the third stage of the PLC is to maintain market share. During the first two stages of the PLC, manufacturers are trying to establish a market and to grow sales. Competition among like products and acceptable substitutes is very strong throughout the maturity phase. Because of the strength of competitive products, companies will see sales volumes peak as the market becomes saturated and there are few new consumers.
Furthermore, as competition increases and new entrants may have technology-induced production advantages, profits begin to decline. Products become less differentiated by a customer with heavy competition forcing prices to commodity levels. As prices fall, loss in profits is compounded.
On the other hand, for companies still making a profit at this time, the maturity stage brings a continued decrease in costs. R&D and capital costs are likely fully absorbed at this point. Manufacturing costs decline as operational efficiencies are continuously implemented. Production is at a high level so per unit costs are low.
An opportunity for companies exists during the maturity cycle to take advantage of the PLC and market forces. A firm that is able to design or develop features and attributes that clearly differentiate the product from competitors can benefit during this stage. Differentiation may also include service packages or significant manufacturing cost efficiencies leading to lowest cost production. A company will focus on the best way to maintain market share during this stage.
Firms must make tough decisions during the final phase of the PLC. The decline stage essentially spells the beginning of the end for a product. Both sales and profits fall throughout this phase. Customers generally stop buying the product in favor of something new or better, despite a manufacturer’s best efforts at differentiation.
When a product is in the decline stage, a manufacturer must decide whether to withdraw from the market or attempt to revamp/rejuvenate the product. The easiest way to stop the fall in sales and profits is to withdraw from the market. This can be challenging for firms, especially when they feel a close attachment to the product, brand, or customer segment served by the product. Yet a company may not be able to reverse an industry decline and it is better to withdraw from the market than to lose more money.
While production and promotion costs are extremely low in the decline phase, a firm may also choose to invest in a product category or brand to rejuvenate or reposition it. As an example, baking soda sales suffered a traditional PLC decline stage as less people used the product for home baking needs. However, Arm & Hammer was able to reposition baking soda in several new markets: odor-absorbent, carpet cleaner, and even cat litter. Rejuvenating a product or brand in decline is not for the faint of heart, however, as marketing and promotional costs to educate consumers can be substantial investments with no guarantee of success.
Applying the Product Life Cycle
Like most theories, the PLC is easier to recognize in hindsight. A drop in sales does not always signify that the product is entering the maturity or decline phases. Instead, other economic, social, political, or environmental forces could temporarily impact product sales. Similarly, an increase in sales may not indicate long-term market growth. A company should use information regarding product sales and profits as inputs to the PLC and identify that it is a model of an average product performing under average conditions.
It is important for firms to understand customer and market needs as well as their own cost formulas. One company may have a cost structure that pushes it into the decline stage before other competitors. The PLC should be used as additional knowledge to make marketing, manufacturing, and investment decisions. One area that the PLC is helpful in analysis is NPD (new product development). Using market, customer, sales, and profit data, a firm can better understand its risk of disruption by a low-end competitor. You can learn more about NPD in an innovation best practices workshop or in a short professional development course on Disruptive Innovation. Note that the PLC is a potential exam topic for both the NPDP and PEM certifications. Contact us at [email protected] or 281-280-8717 for more information. At Simple-PDH, we want to make it simple for you to study, learn, and earn and maintain your professional certifications.
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