Because we live and work in a dynamic market situation, managers must accept as the normal state of affairs that all products have a limited life. This fact is commonly expressed in the form of the product life-cycle curve. Products during their existence go through the phases indicated on the curve, as follows:
1. Starting before, sometimes long before, a product reaches the marketplace, there is a development phase. Market research must be undertaken, the product designed, prototypes built, plants laid down. While costs can be very high, income will initially be nil and will probably grow only slowly. Profits are a long way off yet. Many products are slow to ‘catch on’ and this part of the curve typically does not rise steeply.
2. During the growth phase the product reaches general acceptance, and sales increase steeply. Profits mount as development costs are recovered and unit costs decrease with greater volume of production.
3. As the product reaches maturity, initial demand is beginning to be satisfied, competitors may have arrived on the scene, and there will be greater reliance on replacement sales. Sales increase more slowly, and profits come under pressure and may start to decline.
4. When the market is fully saturated, sales will ‘peak off’ and profits decline still further.
5. Finally, sales will go into definite decline and margins come under very severe pressure as it becomes increasingly costly to maintain sales at a reasonable level.
The curve for any particular product may be steeper or flatter, the time-scale may be longer or shorter. Some products seem to go on for a very long time. For this reason the pattern must be applied with care. In addition, we must be careful what we mean by a product in this context: for example, the market for glass has risen steadily over the past 50 years, but within this period the sale of lamp glasses has declined and that of milk bottles has risen steeply (to decline again in some countries in face of competition from waxed cartons or plastic and the change from doorstep delivery to bulk purchase from the supermarket).
Nonetheless the typical pattern stands as a warning that it is dangerous to rely too heavily for too long on one product, so that, as profit from one declines, profit from its successor rises to fill the gap. Ideally this will give a steadily rising profit for the company as a whole, even though some products have entered the ‘decline’ phase of the product life-cycle.
It must be emphasized that the product life-cycle diagram is not a rigid description of exactly how all products always behave. Rather it is an idealized indication of the pattern most products can be expected to follow.
There is nothing fixed about the length of the cycle or the lengths of its various stages. It has been suggested that the length of the cycle is governed by the rate of technical change, the rate of market acceptance and the ease of competitive entry. So, each year numerous new fashion styles are introduced, many of them to last only a few months. At the other extreme, a new aircraft must have many years of life if it is to be commercially worthwhile.
The main importance of the life-cycle concept is to remind us constantly of the three following facts:
1. Products have a limited life;
2. Profit levels are not constant but change throughout a product’s life in a way that is to some extent predictable;
3. Products require a different marketing programme at each stage of their life-cycle.
Implications of the Product Life-cycle
If we have to accept that no product will go on earning profits indefinitely, then we must plan so as to have a whole succession of new products coming ‘through the pipeline’. Peter Drucker has drawn attention to the need to keep all products under review to ensure that not too high a proportion are at the end of their life-cycle. He describes the following six categories:
1. Tomorrow’s breadwinners – new products or today’s breadwinners modified and improved;
2. Today’s breadwinners – the innovations of yesterday;
3. Products capable of becoming net contributors if something drastic is done;
4. Yesterday’s breadwinners – generally products with high volume, but badly fragmented into ‘specials’, small orders and the like;
5. The ‘also raps’ – generally the high hopes of yesterday that, while they did not work out well, nevertheless did not become outright failures;
6. The failures.
From the product life-cycle concept and Drucker’s analysis of product categories, it follows that all products must be kept under review to assess their present and likely future contribution to profits. A common mistake of marketing management is to keep in the range products that have little or no prospect of contributing to profits. Products are kept in the range until they fade away, meanwhile consuming valuable resources, which could be more profitably utilised elsewhere. These marginal products lower the company’s profitability, and it is essential to control them.