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Product Life Cycle

The stages that a product moves through the marketplace

What is the Product Life Cycle?

The Product Life Cycle (PLC) defines the stages that a product moves through the marketplace as they enter, become established, and exit the marketplace. In other words, the product life cycle describes the stages that a product is likely to experience. It is a useful tool for managers to analyze and develop strategies for their products as it enters and exits each stage.

 

Product Life Cycle Graph

 

Stages in the Product Life Cycle

The four stages in the product life cycle are:

  1. Introduction
  2. Growth
  3. Maturity
  4. Decline

 

1. Introduction Stage

When a product first launches, sales will be low and grow slowly. In this stage, company profit is small (if any) as the product is new and untested. The introduction stage requires significant marketing efforts as customers may be unwilling or unlikely to test the product. There are no benefits from economies of scale as production capacity is not maximized.

The underlying goal in the introduction stage is to gain widespread product recognition and stimulate trial. Marketing efforts should be focused on the customer base of innovators. There are two price-setting strategies in the introduction stage:

  1. Price skimming: Charging an initially high price and gradually reducing (“skimming”) the price as the market grows.
  2.  Price penetration: Establishing a low price too quickly enter the marketplace and capture market share before increasing prices relative to market growth.

 

2. Growth Stage

If the product continues to thrive and meet market needs, the product will enter into the growth stage. In the growth stage, sales revenue usually grows exponentially – the take-off point. Economies of scale are realized as sales revenues increase faster than costs and production reaches capacity.

Competition in the growth stage is fierce as competitors analyze their strategies and introduce similar products. In the growth stage, the market grows, competition intensifies, sales rises, and the number of customers increases. Price undercutting in the growth stage tends to be rare as companies in this stage can increase their sales by attracting new customers to their product offerings.

 

3. Maturity Stage

Eventually, the market grows to capacity and sales growth of the product declines. In this stage, price undercutting and increased promotional efforts are common as companies try to capture customers from competitors. Due to fierce competition, weaker competitors will eventually exit the marketplace – the shake-out. The strongest players in the market remain to saturate and dominate the stable market.

The biggest challenge in the maturity stage is trying to maintain profitability and prevent sales from declining. Retaining customer brand loyalty is key in the maturity stage. In addition, to re-innovate itself, companies typically employ strategies such as market development, product development, or marketing innovation to ensure that the product remains successful and stays in the maturity stage.

 

4. Decline Stage

In the decline stage, sales of the product start to fall and profitability decreases. This is primarily due to the market entry of other innovative or substitute products which satisfy customer needs better than the current product. There are several strategies that can be employed in the decline stage, for example:

  • Reduce marketing efforts and attempt to maximize the life of the product for as long as possible (called milking or harvesting).
  • Slowly reducing distribution channels and pulling the product from underperforming geographic areas. Such a strategy allows the company to pull the product out and attempt to reintroduce a replacement product.
  • Selling the product to a niche operator or subcontracting. This allows the company to dispose of a low-profitable product while retaining loyal customers of the product.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • AIDA Model
  • Beachhead Strategy
  • Buyer Types
  • Market Planning

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!