A tutorial on product lifecycle

by Robert E. Cannon

Today’s marketing managers tend to focus on the short term. They fail to recognize the long-term potential or risk associated with a given product, brand or industry. Knowing the stages of the product life cycle can help managers minimize risk and optimize return on investment (ROI) over the life of the product.

Product life cycle, while not perfect, it is the best tool we have for understanding how products move from inspiration to incineration. The theory is based on the following assumptions:
• All products have limited life spans.
• All products, brands and industries move through identifiable phases.
• Each phase presents a different challenge.

Sales can be the key indicator of the stage of the product life cycle. This indicator is difficult to use effectively, because sales fluctuate and are a lagging indicator. Fluctuations in sales can be related to the economy, government regulations or other factors.

The product life cycle can be applied to a product (such as SUVs), a product class (automobiles) or a brand (Ford). It can also be applied to a style (Art Deco), fashion (Capri pants) and a fad (pet rocks). Each behaves differently within its own life cycle. Particular products come and go, but brands generally have much longer life cycles.

Some consider product life cycle to consist of three stages. Others stretch it to seven or more stages. For our purposes we will use the more commonly accepted thinking that there are four stages to the life cycle (see Fig. 1).

Introduction stage
The introduction stage can also be called the solution stage. A new product is developed to solve a problem or meet a specific need, usually for a specific customer or a select group of customers. It is in this stage that branding begins and quality levels are established. If possible, patents and trademarks are obtained for the intellectual property. Distribution is limited, costs are high, volume is low and promotion is focused on building awareness.

The company looks for early adopters and spends a tremendous amount of time and energy educating the consumer about the product. Profits at this stage are virtually non-existent because of the heavy expenses of product introduction.

The introduction stage has more recently been termed the product development process. Rapid change, increasing competition, complexity, organizational stress and high customer expectations have combined to support a process for reducing product development time. With time as a critical factor in today’s market, speed to market can create a competitive advantage. Instead of being viewed as a single stage, the introductory stage has become the product development process with as many as seven different parts, as shown in Fig. 2.

Idea generation is the first step, with input gathered from customers, users, market research, outside inventors, competitors, other markets and employees. The mortality rate for ideas is extremely high. It takes a huge amount of input in the idea generation phase to ensure a flow of new product ideas that actually make it to the commercial start-up phase.

Each new idea goes through an idea evaluation or screening process. This can range from a very informal review by one or two people to a more formal review by a new product development team. It usually involves determining whether the product fits with the objectives of the company. The strengths and weaknesses of the product are evaluated. The idea is reviewed in light of current or expected market trends. Eventually the product’s volume and revenue potential are estimated.

An idea that survives preliminary evaluation will be passed along for a technical and market evaluation. Can it be produced and marketed? Does the concept make sense to potential customers? Rough estimates are generated for costs, required investment, sales and profit margin. The fall-out in these first two stages is tremendous.

Ideas that make it through the first two evaluations are usually turned over to the company’s engineers for product and process design work. This involves a great deal of liaison work between marketing and engineering with a lot of input from prospective customers.

If the design looks good and the processes make sense, the idea moves into the early development stage. Here prototypes are developed, marketing plans are undertaken and a business plan is developed. Frequently prototypes are shown or tested by prospective customers. Test markets are conducted, and the plans are revised as needed. Once completed, the prototypes and plans are reviewed again against expected objectives.

If everything is on track, the new product moves into final development. Financial estimates are reviewed against the objectives. The tooling begins, and advertising and promotion programs are finalized and initiated.

The last stage is commercialization: Production is started and the product rollout begins.

Characteristics
A truly new product is a basic model, the first of its kind with no competitors. It solves a problem for a specific customer or group of customers. Sales are low, costs are high, and cash flow is a problem unless the company has other income streams. Distribution is limited, and the objective is to build awareness and trial. Anything other than this is probably a line extension.

When I think of a current product in the introduction stage, I think of the Segway, a two-wheeled vehicle with a high price tag and low sales. Sold exclusively by Amazon.com, it is the only product of its kind.

New products are marketed to early adopters. The company’s president would probably handle a business-to-business transaction. The discussion would be less about the product or price and more about “how soon can I get it.”

The sales cycle is very short on new products. It usually involves a quick demonstration. There are virtually no price negotiations, and the sales presentation is more educational than anything else. The seller owns the relationship and has to be creative, a strategic thinker and a problem finder (sometimes called “hunters”).

Strategies
Introduction strategies run the gamut. Companies such as drug manufacturers, with huge technological leads, great patents and deep pockets, tend to use a skimming strategy to defend patents. They institute high prices to support high margins over the life of the patent, dropping their prices when the patent runs out. 

Early software companies and drug manufacturers often used a market leadership strategy wherein they gave away the product to gain a broad base of users and then sold them product upgrades and new releases. Giving away the product built a base of committed users.

Many software companies also use a planned obsolescence strategy. They know well in advance when the next release will be available and can then change prices and marketing strategies to empty the pipeline prior to the next release.

More recently we have found companies using a commoditization strategy. The idea behind this strategy is to continuously price the product in such a manner as to keep competitors out of the market. They work to move the product from introduction or solution to maturity or commodity status (commodity slide) as quickly as possible. The goal is to own the market and create your own cash cow (discussed later).

Growth stage
The growth stage is where the rising tide of consumer interest lifts the boats of all participants. If there were no competitors in the introduction stage, they are now a factor. Consequently, additional product features and support may be needed. Prices are steady to declining, as every participant in the industry is focused on market share and becoming the low-cost producer. Costs are declining with increasing volumes, and profits are improving. Distribution is increasing as well. Competitors are attracted to enter the market.

Usually this is the stage that requires the heaviest investment in marketing to educate, build share and support sales activity. While a marketing plan was developed in the introduction stage, adjustments to the marketing mix are usually required in the growth stage.

The marketing mix includes the four Ps: product, price, place (distribution) and promotion. During the growth stage place becomes a hot bed of activity. Frequently this involves – or will in the maturity stage – changes to product, price and promotion. The product may need modifications for new markets with different packaging, warranty and service requirements. Price may come into play not just as list price but in discounts, financing, terms and other options. Promotion activities such as advertising and public relations will change as new channels of distribution are entered and need to be supported.

Characteristics
During this stage sales are rising, and costs are coming down. Distribution is growing, and profits are rising. Marketing budgets are increased to build awareness in the mass markets and increase market share. Operations are working to deliver consistently high quality and become the low-cost producer to help gain market share. Early adopters have been satisfied, and the mass market for the product is being pursued. Customer communications have shifted from the president to the purchasing director or merchandising manager. Discussion has moved from how soon can we get it to strategies to grow the business.

As competitors enter the market, marketing strategy starts to shift from education and awareness to differentiation. The sales presentation moves to strong proposals and demands higher presentation skills. There is a need to develop trust. The sales cycle is longer, and there are more complex decisions. If you are lucky, the seller and buyer share ownership of the relationship. This stage requires a relationship seller with great presentation skills.

Strategies
According to the Boston Consulting Group, there are two types of players in the high market growth stage – stars and problem children. Stars have high market shares. They may require additional investment but have the potential of remaining a strong contender and generating a good revenue stream for a long time. Problem children have low market shares. If you follow Jack Welch’s General Electric philosophy, then you have three options with problem children. Can you invest enough to make them a star and still generate a good return on investment? Can you find a niche that you can own and generate a good return? If neither of these makes sense and the product or company is not No. 1 or No. 2 in its market, then it may be time to sell the business.

Maturity stage
The market maturity stage occurs when the market has become saturated. Sales growth rate tends to decrease. Efforts are focused on differentiation of the product. Pricing may be lower because of increased competition. More internal pressure is placed on reducing costs. Margins begin to shrink as marginal competitors are forced out of the market. Distribution is maxed, and promotions come into play as a way to encourage preference over competing products.

Market share becomes the main focus in the maturity stage. The market is well established. There are numerous players, although some have started falling by the wayside, and the competitive pressures are building. If your profits are steady or increasing, regardless of where you are on the product life cycle, you are well positioned. On the other hand, if profits are flat or decreasing, then it is time to take action.

Characteristics
Sales reach their peak, while pressure remains on reducing price. The product must be defended against competitors and promoted to build stronger retail relationships. Distribution is intensive, and profits start out high but can drop quickly. The company works to maximize profits while defending market share. Instead of dealing with the president or merchandise manager, the salesperson is relegated to dealing with the buyer. It is a relationship that the buyer controls and constantly looks for more from the supplier. This takes a salesperson who is a strong negotiator, flexible and persistent. It requires relationship-building and problem-solving skills.

Strategies
Everyone looks for new markets, more models and ways to increase usage or diversify. In the low-to-no-growth stage, there are two types of players. Cash cows are what everyone hopes for, but few attain. They have a high relative share in a low-growth market, and they harvest the profits.

The other position is that of the dogs. They have low market share in a low-growth market. It doesn’t usually make sense to invest heavily to gain market share unless there is some reason to believe that the market might once again move into a growth stage. It might also have some strategic importance and might be considered a “guard dog.” More than likely, it may be something that you want to divest if possible and reinvest where there is more opportunity.

Decline stage
The market decline is recognized by the downturn in the demand for the product. It may be hastened by the introduction of an innovative new product or changing consumer tastes. As volume declines, competitors focus on maintaining market share while maximizing profits (see Fig. 3). Efforts focus on rejuvenating the product by adding features and finding new uses. Intense competitive pressures may result in the withdrawal of more products from the market.

Strategies may change or remain the same in the other stages, but action is critical in this stage. It does not necessarily mean it is time to abandon your product altogether. Certainly if it generates a profit, or can be made to generate a profit with an infusion of capital that can achieve a reasonable payback, then by all means harvest the profits while you can.

Characteristics
Declining sales define the decline stage. Profits are also declining. Costs will remain steady or decline. Now is the time to prune unprofitable distribution. Advertising should be reduced unless there is some hope of repositioning the product in an effort to prolong its life and the potential for profits. At this point your product has become a commodity. The salesperson ends up dealing with a re-buyer and often is responding to requests for quotes. The type of salesperson needed is a harvester, someone who can handle quotations, is good at prospecting, has good organization skills and is well disciplined. The buyer owns the relationship.

Strategies
While two strategies are commonly followed in the decline stage  -- close up shop or milk the cash cows -- there are a number of other good strategies that can extend the lifecycle and increase the return on the original investment in the product, brand or company. 

Some of the options are shown in Table 1.

Table 1. Product Life Cycle Decline Strategies

Without an understanding of the product lifecycle, marketers are flying blind. Strategic decisions made under these circumstances tend to be short-term and not much more than guesses. Using the product lifecycle as a tool for evaluating your current business situation facilitates a longer-term perspective and can point out options for future strategic decisions.

Bob Cannon began Cannon Advantage in 2001 after 33 years of honing his business skills in corporate sales, strategy, management, planning and marketing. He helps companies identify and solve problems to provide better value to their customers, secure jobs and improve profitability. For more information visit Cannon’s Web site.

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