What it means
Most products follow a pattern with four main stages: introduction, growth, maturity and decline. Sales, profit margins and the amount of investment needed are very different in each stage, so a single management approach does not suit them all.
In the introduction stage, sales are low and costs are high because the company is paying for development and for building customer awareness. During growth, sales climb quickly and the product starts to earn profit, while competitors begin to appear.
At maturity, sales level off and profit is at its highest, but competition and price pressure grow. In decline, sales fall because of new technology or changing tastes, and the company must decide whether to refresh the product, cut costs, or withdraw it.
Management of this life cycle also covers the work before launch and after withdrawal. Designers and engineers are asked to consider costs of making, servicing and disposing of the product, since a large share of the total cost is often fixed during design.
Many firms use specialised software, called product life cycle management systems, to keep a single record of designs, specifications, suppliers and changes. This avoids the mistakes that occur when departments work from different versions of the same information, such as building a product to an outdated drawing.
For finance teams, the main value is a lifetime view of profit. Looking only at annual figures can lead to a product being dropped too soon, or kept alive for too long because past investment is hard to write off.
In practice
Real-world examples.
Example
A carmaker plans each model for about seven years. It spends heavily on design in the first two years, expects peak profit in years three to five, and plans a facelift in year five. Finance reviews profit for each model on a lifetime basis. A model that loses money early is judged against its expected later years.
Example
A software company releases version 1 of an app and gathers feedback. It adds features while customers are growing, then cuts marketing when growth slows. When usage falls, it plans to retire the old version and move users to a new product.
Example
A pharmaceutical company has a patent that protects a drug for a set number of years. As the patent end approaches, it plans for a fall in sales because cheaper copies will enter the market. It launches a new formulation to keep part of the market. Finance models how much revenue it can protect and when.
Formula
Calculation
Lifetime profit = lifetime revenue - development cost - production cost - marketing cost - support and end-of-life cost
Suppose a company develops a kitchen gadget at a cost of $2,000,000. Over its life, the gadget earns revenue of $9,000,000. Production costs are $5,000,000, marketing is $1,000,000 and support and withdrawal costs are $500,000.
Lifetime profit = 9,000,000 - 2,000,000 - 5,000,000 - 1,000,000 - 500,000 = $500,000.
Lifetime margin = 500,000 / 9,000,000 = about 5.6%. If development had overrun by $400,000, lifetime profit would fall to $100,000, which shows how early costs affect the whole return.Case study
Seen in the real world.
Brightline Audio is an illustrative, fictional company that sold wireless speakers. The speakers sold well for three years, and the sales team wanted to keep spending $1,500,000 a year on advertising.
The finance manager produced a life cycle chart that showed sales had passed their peak and were now falling by 15% a year. Further advertising was adding sales of only $900,000 a year, and the margin on those extra sales did not cover the cost.
In this illustrative story the company cut advertising to $400,000, moved engineers to a new product and announced an end date for the old range. By planning the withdrawal in advance, it sold the remaining stock at a modest discount and avoided a large write-off.
Watch out
Common mistakes.
- Judging a product on a single year's profit instead of its lifetime performance.
- Ignoring end-of-life costs, such as storage, support, warranty claims and disposal, when making the original business case, which makes the product look more profitable than it is.
- Continuing to invest in a declining product because of money already spent, when only future costs and benefits matter.
Questions
People also ask.
What are the stages of a product life cycle?
They are usually introduction, growth, maturity and decline, although some models add development at the start and withdrawal at the end.
Does every product follow the same curve?
No, some products last for decades while others, such as fashion items, pass through the stages in a few months, and the shape also depends on competitors and technology.
How does product life cycle management differ from product management?
Product management is the day-to-day role of running a product, while life cycle management is the wider process of controlling its data, costs and decisions from concept to retirement.
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