This article explains how Price Elasticity of Demand (PED) is likely to change through the different stages of Product Life Cycle (PLC).
As a result of changes in Price Elasticity of Demand (PED), the levels profit and Cash Flow from a product – in this case the free-standing solar panels – changes as the product moves through its life cycle.
Initially in the DEVELOPMENT stage, high development costs (likely for solar panels) and high promotional costs will mean a negative Cash Flow, but as the product moves through the growth phase and into maturity, the Cash Flow should start to become positive.
The profitability of free-standing solar panels will also change through the life cycle of the product. This will be partly due to the fact that price elasticity of demand will tend to vary at each stage of the product life cycle.
In the early stages of the Product Life Cycle, the demand for the product tends to be rather inelastic.
In the GROWTH phase of the Product Life Cycle (PLC), the free-standing solar panels may tend to be fairly inelastic in nature.
People buying at this stage will tend to be ‘innovators’ and they may be prepared to take risks with new products. Price will not be such an important consideration for them. They have a greater ‘need’ for the product.
This may lead to a high profit margin at this stage of Product Life Cycle (PLC), though overall profitability is likely to be low, or even negative, due to the high development and production setup costs for the solar panels.
In the later stages of the Product Life Cycle (PLC), the demand for the product tends to be fairly elastic.
However, as the product moves towards MATURITY, the price elasticity will increase.
The amount of competition will increase and the increasing number of substitutes will make consumers more price-sensitive. The nature of the consumers will also change as they are likely to be more motivated by factors like price, functionality and reliability. This is particularly likely to be true for solar panels as they gain more widespread acceptance.
This may lead to a lower profit margin at this stage of the Product Life Cycle (PLC), though overall profitability is likely to be higher due to higher sales and the fact that introductory cost should be paid off.
Profitability will, however, depend on the nature of the competition for the product.
