Definition
The product life cycle is a business concept that describes the stages a product goes through from when it is first introduced in the market until it is eventually removed from the market. The four stages typically include introduction, growth, maturity, and decline. Each stage has different sales volumes, profitability and requires different marketing strategies.
Key Takeaways
- The Product Life Cycle (PLC) is a crucial concept in finance that outlines the progression of a product through four stages: introduction, growth, maturity, and decline. During each stage, the product’s sales, profit, market share, and cash flow can vary significantly.
- PLC is primarily used for product management and strategic marketing. It helps businesses make decisions about pricing, promotion, distribution, and product improvements, making it a key tool in financial planning.
- Understanding the Product Life Cycle can also have implications for investment, as it can guide investors on when to invest in a product, depending on the stage of the life cycle and the potential returns. Products in different stages require different levels of investment commitment and risk acceptance.
Importance
The finance term, Product Life Cycle, is important because it helps businesses understand the performance and profitability of a product throughout its lifecycle.
This includes introduction, growth, maturity, and decline stages.
The concept allows companies to predict the product’s profitability, strategically plan marketing activities, manage inventory, invest in research and development, and make informed decisions about when to discontinue a product.
Understanding the Product Life Cycle makes it possible for businesses to strategically position their products, manage cash flows more effectively and ultimately, attain financial success and sustainability.
Explanation
The Product Life Cycle (PLC) is an essential concept in finance that helps companies strategize and make informed decisions about marketing, pricing, and product development. Its primary purpose is to map the stages of a product’s life from its inception through development, growth, maturity, and its decline or termination. Understanding this life cycle aids businesses in predicting their product’s performance, enabling them to allocate resources efficiently, plan for potential challenges, and strategize about various aspects like product diversification or enhancement when the product reaches certain stages.
When a particular product undergoes different phases in the PLC, their profitability & market competitiveness varies along those stages. Each phase: introduction, growth, maturity, and decline, presents unique costs and revenue figures. Depending on these phases, financial management decides the pricing strategy, marketing approach, and product innovation requirements.
For instance, during the introduction and growth phases, businesses may face significant expenses related to product launch and market penetration; therefore, investment decisions must be made with caution. On the other hand, the maturity phase normally yields higher profits, and decisions about modifications or expanding the product’s market can be prioritized. Hence, understanding the PLC is integral to financial decision-making and planning.
Examples of Product Life Cycle
Apple’s iPhone: The iPhone followed a typical product life cycle. When it was launched in 2007, this innovative product was in its introduction stage. As the popularity of the iPhone grew rapidly, it entered the growth stage, with sales skyrocketing. By regularly adding new features and models, Apple has successfully maintained the product in the maturity stage, with stable and profitable figures. However, with increasing market saturation and competition, some individual models may enter the decline stage.
Netflix DVD-by-Mail: Netflix’s DVD-by-Mail service is a great example of a product that has moved through the entire product life cycle. This service was introduced in 1998 and experienced significant growth in the early 2000s. By 2010, the service reached maturity as Netflix had millions of subscribers. However, with the rise of digital streaming, the DVD-by-Mail service began its decline stage and has slowly been phased out.
Kodak Film Cameras: Kodak film cameras serve as an example of the entire product life cycle as well. The introduction and growth stages happened in the early-to-mid 20th century when photography was becoming mainstream. For decades, Kodak dominated the film camera industry and was in the maturity stage. However, the advent of digital photography eventually led to a decline in the demand for film cameras, and Kodak’s film camera business ultimately dropped to almost non-existence after not being able to adapt to the digital revolution. Today, film cameras are largely considered nostalgic and vintage items.
Frequently Asked Questions about Product Life Cycle
What is a Product Life Cycle?
A Product Life Cycle refers to the stages a product goes through from when it was first thought of until it ultimately is removed from the market. The stages include: introduction, growth, maturity, and decline.
Why is understanding the Product Life Cycle important?
Understanding the Product Life Cycle is vital as it helps businesses make strategic decisions about developing, pricing, promoting, and discontinuing products. Businesses can assess where a product currently is in its life cycle in order to predict future sales patterns and profitability levels.
What happens during the Introduction stage of the Product Life Cycle?
During the introduction stage of the Product Life Cycle, the product is launched into the market. This is generally the most expensive stage due to high costs associated with development, consumer testing, and marketing efforts to introduce the product to the public.
What happens during the Growth stage of the Product Life Cycle?
During the growth stage, sales of the product start to grow significantly. The market becomes more aware of the product and if it is satisfying a need or want, it’s sales will generally see a healthy increase. This is often associated with a strengthening market position and increase in profitability.
What happens during the Maturity stage of the Product Life Cycle?
The maturity stage is when a product reaches peak popularity. Sales will typically plateau during this stage. As competition may increase, this stage includes implementing changes or improvements to the product in order to maintain its market position.
What happens during the Decline stage of the Product Life Cycle?
During the decline stage, sales begin to fall. This could be due to market saturation, outdated technology, or changing consumer trends. Ultimately, the product may be removed from the market.
How can companies manage each stage of the Product Life Cycle effectively?
Companies can manage each stage of the Product Life Cycle by closely monitoring market dynamics and consumer preferences and adjusting their strategies accordingly. Planning and forecasting also play a crucial role in managing product life cycles effectively.
Related Entrepreneurship Terms
- Introduction Stage
- Growth Stage
- Maturity Stage
- Decline Stage
- Product Saturation
Sources for More Information
- Investopedia – An educational site with an industry-leading financial dictionary, providing a clear summary and examples on the concept of ‘Product Life Cycle’
- Corporate Finance Institute (CFI) – A leading provider of online financial modeling and valuation courses. They offer a clear, concise understanding of Product Life Cycle and its stages.
- The Economic Times – One of the world’s leading business news outlets offering a variety of finance and investment resources including information about Product Life Cycle.
- Harvard Business Review (HBR) – Known for its deep insights and practical advice on finance and other business topics, the HBR website carries lots of resources on ‘Product Life Cycle’ concepts.
