The product life cycle describes the sales pattern of a product over time. Generally, the time span begins with product introduction and ends with its obsolescence and replacement. While the form of the life cycle is fairly standard, it is subject to variations. The concept underlying the premise of product life cycle is that all products pass through the stages outlined below and illustrated in Chart 1.
Basic Stages in the Product Life Cycle
- Development Stage
- Growth stage
- Maturity stage
- Decline stage
The first of these stages, the development stage, represents a slow growth period. It is assumed that newly released products require some time to gain market acceptance, so sales in the initial period are slow.
If the product introduction proved successful, rapid growth stages are reached and sales increase markedly. According to the concept of the life cycle, the market for any product is limited, and sales will generally fall short of their potential. When this point is reached, the market enters the maturation stage. The life cycle goes further to assume that each product eventually is replaced by another or that initial rapid growth will end in decline.
If a product enters a market that has already moved into the mature stage, competition is intense because the product must compete for a share of an existing market that is not experiencing growth. Once the market enters the decline stage, new products are not entering the market and demand levels are falling. At this point, the objective is to increase market share to maintain stable sales levels.
Methods of Measurement
The concept of the product life cycle has become central to market forecasting. The stages of the life cycle form a framework that you can use to analyze the dynamics and the primary factors that can impact a market segment and product sales.
The basic stages of the product life cycle can be expanded into a more-comprehensive model that better explains the various parts of the life of a product in the market. The list below outlines the various stages of the expanded product life cycle concept.
Stages of the Expanded Product Life Cycle
1. Research and development
2. Product introduction
3. Development of the market
5. Market maturation
6. Market saturation
7. Market decline
To calculate or measure at what stage of its life cycle a given market is, the following parameters need to be measured and monitored:
- Investment in R&D by year
- Number of competitors in the market by year
- Number of competitors that entered the market by year
- Number of competitors that left the market by year
- Market growth rate by year
- Market size by year
- Industry profitability by year
- Investment in marketing (such as advertising, trade shows, and direct sales forces) by year
The measurement of these parameters over time will help you determine what stage a given market is in. Figure 1 below has been developed to aid you in making this determination:
Figure 1 - Market/Product Age: How to Measure the Stage of the Product Life Cycle
|Stage ||No. of Competitors ||Market Growth (%) ||Profits ||Market Size ||Investment|
|R&D ||Unknown ||0 ||0 ||0 ||Growing|
|Product Introduction ||Few ||Highest ||0 ||Small ||High|
|Development ||Growing Fast ||High ||Low ||Small ||High|
|Exploitation ||Moderate Growth ||Good ||Growing ||Modest ||High|
|Maturation ||Stable ||Low ||High ||Largest ||Stable|
|Saturation ||Stable ||None ||Lowering ||Stable ||Declining|
|Decline ||Reducing ||Negative ||High & Low ||Declining ||Stopped|
Note: All figures are rounded. Source: Frost & Sullivan
During the R&D stage, profits are nonexistent. In certain rare circumstances, profits are made early in the life cycle. However, generally profits are not made until the development of the market stage. It is usually at this point that products that have not reached profitability are withdrawn from the market.
Profits reach their zenith during the exploitation stage; the maturation stage and saturation stages are characterized by steady to declining profits. The declines in profits typical during these stages are attributed to increased competition. Profits will continue to decline to the point where they no longer exist, and losses will take hold during the product decline stage.
Thus, the life cycle is vital as a planning tool because the extent of profit changes during each stage of the life cycle. Forecasting and market planning over the medium term can be performed effectively using the product life cycle segments as the timing stages. The marketing strategies used will have to be modified as the product passes through each stage of the cycle.
What Does Market/Product Age Really Tell You?
Recognizing the current stage of the life cycle for a product type is vital to a firm considering the introduction of a product of that type. It is considerably easier to enter a market in a growth stage than it is to enter a saturated, mature marketplace. Levels of competition in markets experiencing growth are considerably less intense than in mature markets, where competitors are concerned about loss of sales and market share. Introducing a product into a market characterized by intense competition will probably prove expensive and result in retaliation from established competitors.
The product life cycle can be used to determine likely competitive trends. The list below outlines the typical levels of competition for each stage of the life cycle process.
Typical Competition for Each Product Life Cycle Stage
Levels of competition are practically non-existent since the company introducing the product can be the sole supplier.
The market is still dominated by the product innovator, but other companies have entered the market and developed smaller shares.
A single company usually remains the primary force in the market although it may not be the product originator. The product innovator may have been overtaken by subsequent market entrants. In addition, the market leader may be fending off leadership challenges from other large competitors. Generally, the leading company's share will experience decline over this period as competitive activity in the market continues.
The leading company usually still holds its leadership position, but its share is smaller than that of all other market competitors together.
A host of smaller companies are all engaged in trying to secure a market niche they can dominate. Towards the conclusion of the saturation period, three of four competitors typically emerge to dominate the market. Vigorous marketing allows these competitors to hold the majority share.
The market leader during the saturation stage may be replaced by a competitor better suited to competing in small, contracting markets. As specialized market segments continue to decline in scale, larger-scale producers cease to perceive them as profitable. Sales typically diminish across the board as products become more obsolete and are replaced by newer technology.
The primary reason for stressing the importance of the product life cycle is that for each stage or segment of the life cycle a different marketing strategy will prove best in meeting the unique demands of that stage of the life cycle.
Market factors such as demand and supply are changing constantly as they pertain to your company, market, and industry, so a detailed knowledge of the appropriate product life cycle can make your market strategy more timely and effective.
Case Study: Medical Ultrasound Technology
The age of a market can be a tremendously important indicator for a company on how it should structure its new product development programs and marketing investments.
One client in the medical ultrasound business had two products in the development phase in 1979: a real-time scanner and a B-scanner. The B-scanner project had started several years before, and at project commencement the second generation of its B-scan product was experiencing sales growth of 40 percent per year.
The technology for a B-scan image appeared to be in danger of being superseded by real-time images. B-scan images could be taken every 10 seconds, versus eight per second or more with the new real-time machines.
The B-scanning machines still offered some advantages in positioning, and the firm felt the image quality would be better with B-scanners, so the project continued. In 1980, the project came up for review. A careful analysis showed that the market for B-scan ultrasound equipment was indeed maturing. The unit and dollar sales for B-scanning instruments had stabilized in 1979-1981. The market, despite a slight recession at the time, was mature and had reached saturation. The real-time units were in a very rapid growth stage, expanding at over 300 percent per year. However, the real-time market was still a great deal smaller than the B-scan market, which was close to $100 million per year.
The big question was when the market would leave the maturity stage and move into the decline stage. This calculation would have to be based on market engineering, and we decided to undertake two separate investigations:
- Interview competitors on their R&D plans for B-scanning equipment and their opinion of future technical trends
- Interview 1,000 medical practitioners to get a feel for their purchasing plans
We quickly found we were in serious trouble. During the competitive interviews we found that 12 manufacturers had abandoned future R&D in the product area. This was extremely illuminating, as they were no longer supporting the product type in the trade press or at trade shows.
Our beliefs were confirmed as we conducted customer interviews. Of the 675 responses received, fewer than 8 percent were interested in future purchases of B-scan equipment. Over 70 percent of survey respondents expressed strong interest in real-time imaging devices, and in the future would consider purchasing only these instruments.
It was now obvious that this product would be stillborn. The client could never sell enough units to recoup initial R&D and product marketing investments. Unfortunately, our presentation to the company failed miserably. The firm's management was composed largely of engineers who expressed disbelief in the results, indicating that market engineering was "for toothpaste and did not apply to high-technology markets."
We were slightly off kilter in our forecasting. The market did not decline over the next three years as we predicted - it was totally dead within 18 months. Six manufacturers went out of business, another cut prices by 75 percent. The remainder of the manufacturers had shifted to real-time instruments to cater to swings in market demand.
Unfortunately, our client not only lost the $5 million the firm allocated to R&D, but also an additional $3 million in marketing expenses. We had also miscalculated on the sales forecast for the product:
- Market engineering projected: 50 units per year
- The client projected: 200 units per year
- The market purchased: 5 units per year
The actual market history for this ultrasound market is presented in Chart 2. It clearly illustrates the product life cycle of B-Scan images.
We should point out that the goal of these case studies is not to show how clever we are and how naive clients can be. We are trying to illustrate that the market is constantly giving off valuable signals that need to be quantified and acted uponnot ignored. Most certainly, these signals are not always 100 percent accurate. However, they can greatly increase the probability of your making the right decisions. As you know, you need to be correct only 51 percent of the time to come out ahead in the long run. Also, even though many of the measurements turn out to be inaccurate, it is not the relative precision of the forecast that counts, but rather that the trends of the market are properly identified.