Marketing managers need to be aware of major uses of Product Life Cycle (PLC). Let’s start by thinking about the following questions to see how well-aware you are of the uses of Product Life Cycle (PLC) to your business.
QUESTION 1: When would you advise a firm to lower the price of its product? Is it in the growth stage or in the decline stage?
QUESTION 2: When is advertising likely to be the most important? Is it during the introduction stage or in the maturity stage?
QUESTION 3: When should variations be made to the product? Is it during the introduction stage or at maturity?
QUESTION 4: When should the business start thinking about increasing the numbers of retail outlets? Is it in the Research and Development (R&D) stage or in the growth stage?
While there are no definite answers to these questions above, there are certain common marketing decisions that business managers need to make during different phases of the product life cycle.
However, the final decisions will always depend on the internal and external business environment including the marketing objectives of the business, competitors’ actions or the state of the economy.
Main uses of Product Life Cycle (PLC)
The Product Life Cycle (PLC) concept has three main uses:
- Product Life Cycle (PLC) & 4Ps of Marketing Mix. Assisting with planning the Marketing Mix decisions, such as new product launches, price changes or new promotion methods.
- Product Life Cycle (PLC) & Investment, Profit, Cash Flow. Identifying how Investment, Cash Flow and Profit might depend on the cycle of a product.
- Product Life Cycle (PLC) & Product Portfolio. Recognizing the need for a balanced Product Portfolio.
Let’s take a look at them in details now.
1. Product Life Cycle (PLC) & 4Ps of Marketing Mix
Different stages of Product Life Cycle (PLC) have different impact on marketing decisions about Product, Price, Promotion and Place (Distribution). That is why each stage may require a different Marketing Mix.
1. RESEARCH AND DEVELOPMENT (R&D)
Product. Companies invest a lot of money developing the product before introduction. Creation of prototype with feedback from target market. Alpha and Beta releases for testing
Price. The costs of researching, designing and developing the product might be taken into consideration when setting up the price for the product.
Promotion. While there is no promotion of the product at this stage yet, the company can start informing potential customers about the product it is currently working on.
Place (Distribution). The product is not available on the market yet. However, the prototype might be tested in limited number of carefully selected outlets.
2. LAUNCH (INTRODUCTION)
Product. Usually, only a basic model of the product is available. So, only one product is launched, alternatively few products, relatively undifferentiated.
Price. The price may be either high or low compared to competitors. Firstly, the price might be high compared to competitors. The company will assume price skimming pricing strategy to recoup research and development costs. The price will be high, if the product has no immediate competition. Secondly, the price might be low compared to competitors. The company will assume market penetration pricing strategy to gain market share quickly. The price will be low, if the company wants to attract customers.
Promotion. There will be high levels of informative advertising and other promotional activity when a product is being introduced into the market. It is done to make the consumers aware of the product’s arrival on the market. High promotional activity, such as advertising, to create produce awareness, inform consumers that the product is on the market and educate consumers about the product. Free samples of the product or trial incentives will most likely be used.
Place (Distribution). The availability of the product for sale will be restricted to only selected outlets until consumers show acceptance of the product. Possibly, only in high-end outlets, if price skimming strategy is chosen. This arrangement might be used as a ‘test market’.
3. GROWTH
Product. Changes might be made to the product as a result of feedback from consumers in the test market. Planning of product improvements and developments will be made to maintain consumer appeal.
Price. If the product is successful, an initial penetration pricing strategy could now lead to rising prices. Brand image helps to create customer loyalty. If the price is originally low, it can be increased to one which is similar to that of competitor products.
Promotion. Consumers need to be convinced to make repeat purchases- brand identification will help to establish consumer loyalty. Promotional activity is still high to continue to persuade existing consumers to buy the product again and again as well as to attract new customers.
Place (Distribution). There will be growing number of outlets in areas indicated by strength of consumer demand. The product is now widely available which helps to increase sales.
4. MATURITY & SATURATION
Product. Extension strategies might be used to keep the product in this, the most profitable stage of its life cycle. At this stage, modifications are made to the product – new models, colors, accessories, etc. New features are added to differentiate the product from the competition, packaging is improved and the firm heavily focuses on product quality.
Price. Many competitors are likely to be entering market, hence there will be a need to keep prices at competitive levels. Price will remain similar to that of competitor products. However, if the original price was high due to the uniqueness of the product, then it will probably need to be decreased as competitors will have introduced similar products. There will be a need to keep prices at competitive levels. So, possible price reductions in response to strong competition. If there is less competition, maintain prices at current levels.
Promotion. As the brand continues growing, the company needs to stress the positive differences from the competitors’ products to build brand preference. There will be emphasis on differentiation and building of brand loyalty in promotional messages. Promotion will be more intensive with new channels added when demand increases. Promotional activities are aimed at reminding consumers that the product is still available in the market and how it differs from that of competitor’s products. However, there might be an increase in promotional activities for a short period of time, if this is used as an extension strategy.
Place (Distribution). The product is now available for purchase through a wide distribution network. There will be the highest geographical range of outlets as possible. The company will add new distribution channels by developing new types of outlets where possible. Additionally, incentives to resellers will be offered to avoid losing shelf space and switch from selling competitors’ products.
5. DECLINE
Product. The product and packaging is not altered as it would cost money, so the firm is avoiding investing more money in the product. As the product is now becoming less popular, the firm will reduce number of products in the product line. Preparations need to be made to replace the product with other products by slowly withdrawing from certain markets.
Price. The price will most likely going to be reduced to maintain sales. Especially it might be maintained for continued products sold in a niche market. Also, the business may lower prices to sell off the remaining stock before withdrawing the product from the market. So, the price will be lower in order to liquidate. If the product has a small group of very loyal customers, prices could even rise.
Promotion. In this stage, expenditures on promotion are low. Advertising and other promotional activity is likely to be a lot lower, or even very limited, when a product is entering the decline stage. The only promotional activity is to advertise the lower price of the product or other promotions aimed at selling the remaining stock. Therefore, promotion will be used just to inform about the lower price.
Place (Distribution). More selective. Distribution will be more selective with the product being available only in profitable outlets. The firm will be phasing out unprofitable channels of distribution and eliminating unprofitable outlets for the product.
2. Product Life Cycle (PLC) & Investment, Profit, Cash Flow
Different stages of Product Life Cycle (PLC) have different levels of investment, profit and cash flow. That is why each stage may require a different approach. Here is the relationship between Product Life Cycle (PLC) with Investment, Profit and Cash Flow.
A. INVESTMENT
Investment is vital to business development in the long-term and ignoring the link between investment and product life cycles could be very serious. The level of investment from a product as it moves through its life cycle will change at different stages.
- RESEARCH AND DEVELOPMENT (R&D). Very high investment level as cash is mainly spent on basic research and applied research, and development. The company pays for it using financing through various sources of finance, retained profit or cash inflows from mature products. Design, development and testing require a large initial investment in resources and time to create a prototype. Alpha and Beta version of the product will most likely be released for testing with feedback from target market.
- LAUNCH (INTRODUCTION). Very high investment level on marketing activities. Cash is spent manly on promotion to maximize launch resources. The product will usually be priced high using price skimming pricing strategy to cover those costs of heavy marketing as well as previous costs of research and development.
- GROWTH. High investment level on persuasive promotion, necessary product improvements, growing production capacity and expanding distribution network.
- MATURITY & SATURATION. There will be less investment mainly on reminding promotion. Cash will mainly be spent on extension strategies.
- DECLINE. There is very little investment at this stage, if any. Cash will most likely be spent on divestment withdrawing the product from the market.
B. PROFIT
The profit from a product as it moves through its life cycle will change. Profit is vital to business growth and prosperity in the long-term as it contributes toward creating shareholder value.
- RESEARCH AND DEVELOPMENT (R&D). None. No sales revenue at this stage, so obviously no profit.
- LAUNCH (INTRODUCTION). Little profit, if any as there is very little sales revenue. With high start-up and promotions costs, the business wants to minimize launch time frame to introduce products to the market as fast as possible.
- GROWTH. There is profit once the costs of researching and developing the product as well as launch costs are recovered. With accelerating sales due to better brand awareness and expansion of distribution channels, the profit should be rising too. The product will mainly start to be profitable due to economies of scale achieved in production and marketing.
- MATURITY & SATURATION. There is high profit, but little or no growth in sales. While profit is at its maximum in this stage, it highly depends on costs to defend market share. With competition beginning to become attracted to the market, this poses risks to future profits.
- DECLINE. There is still some profit, but it is falling and may start disappearing as prices are reduced and sales decrease. Sales and profits decline mainly due to shifts in demand, new technology, or new models appearing on the market. Price levels fall as the firm is trying to get rid of inventory prior to the product withdrawal from the market. Product termination costs may minimize the profit to zero or even negative levels.
C. CASH FLOW
Cash Flow is vital to business survival and ignoring the link between Cash Flow and product life cycles could be very serious to the overall liquidity position of the business. Cash Flow from a product will vary as it moves through its life cycle will change.
- RESEARCH AND DEVELOPMENT (R&D). Cash Flow is highly negative during the research and development of the product. Initial development costs and promotional costs are high, but no product has been produced or sold yet, so there is not cash from sales of the product,
- LAUNCH (INTRODUCTION). Cash Flow is still negative at introduction. While the development costs might have ended, but heavy promotional expenses are likely to be incurred in this stage. The business keeps spending cash and this could continue into the growth stage. In addition, there is likely to be much unused factory capacity at this stage while product modifications may need to be made. All these factors will place a further strain on cash resources.
- GROWTH. As sales increase, then Cash Flow should improve. As the product moves towards the end of the growth stage and into maturity, the Cash Flow should start to become positive. But, the exact moment will depend on the length of trade credit being offered to customers.
- MATURITY & SATURATION. Cash Flow should be positive by now. The maturity stage is very likely to see the most positive Cash Flows that the company will ever have from selling the product. It is because sales are high while promotion costs might be low with spare factory capacity being low as well.
- DECLINE. As the product passes into the decline stage, Cash Flow is initially positive, but starts falling and later turns negative. Falling sales along with price reductions are likely to combine to reduce Cash Flows. When a business organization has too many products either at the decline or the introduction stages, then the consequences for Cash Flow could be serious. The business may be even facing liquidity crisis.
The following chart shows the connection between Investment, Sales, Profit and Cash Flow in Product Life Cycle (PLC):
3. Product Life Cycle (PLC) & Product Portfolio
The product is often considered to be the most important element of Marketing Mix. If the product fails to satisfy customer needs and wants because it does not work, is poorly designed or looks ugly, even low prices and extensive will not help to sell it well.
A. BALANCED PRODUCT PORTFOLIO
Having and managing the Product Portfolios effectively helps a business organization to achieve its pre-established marketing objectives.
Various products should be developed, launched and managed properly to help the business increase sales revenue and profitability. When one product declines, other products should be developed and introduced to the market to take its place.
This is how the ideal Product Portfolio looks like on the Product Life Cycle (PLC) chart:
B. PRODUCTION CAPACITY
Capacity of the factory should be kept at constant levels because declining output of some goods which are becoming less and less popular will be replaced by increasing output for the recently introduced products.
The business should be able to switch between producing different products depending on shrinking and growing demand for different products.
A business with a balanced product range is a successful business.
C. CASH FLOW TRANSFERS
Cash Flow should be reasonably balanced between different products in the Product Portfolio. The company should have products in each and every stage of Product Life Cycle (PLC).
In this way, the positive Cash Flows from the successful products in Maturity and Saturation stages will be used to finance the cash deficits of other products which are in Research and Development (R&D) and Launch (Introduction) stages.
While the product is a very important part of the entire Marketing Mix, it is just one part of the overall strategy of the business needed to attract and keep customers. In addition to offering a successful product, both price, promotion and place are also key factors in making the entire marketing strategy successful.
Hence, having a balanced and integrated Marketing Mix is essential. Additionally, without a well-managed Product Portfolio comprised of several products that offers customers real and distinctive benefits, marketing objectives are very unlikely to ever be achieved.
