What is the product life cycle?
There are many different models that describe the life cycle of the product, some consist of four and others of five or six stages, and obviously the real world it is much more complex. For this post, I’ll keep it pretty simple and basic.
Stages of the product life cycle:
1. Introduction
2. Growth
3. Maturity
4. Rejection
Effect on prices
Introduction
During the introduction stage of a product, the price is usually higher. This strategy aims to recoup development costs as quickly as possible to start making a profit. For popular products such as cell phones, the target market demand is relatively inelastic, allowing these higher prices to be charged during the introduction stage. Many consumers live to have the newest technology at all times and are willing to pay a high price to own it.
Growth
During the growth stage, the competition has entered the market by increasing the available quantity of a certain product and therefore increasing the supply. With increasing competition, prices are set lower to be competitive in the market. In addition, companies have recouped the costs of successful product development and thus can start charging lower prices and still make a high profit.
Maturity
The maturity stage of a product generally eliminates the companies that charge the highest price for the given product, thereby further increasing low-price competition and causing downward pressure on prices. Between companies, prices tend to stabilize and most companies offer a similar price. During the maturity stage, prices between competitors generally decline at a similar rate. Occasional increases in the price of a product (during the maturity stage) represent an increase in the costs of inputs, etc.
Decrease
During the decline stage of a product, prices fall, because the companies that remain in the market try to reach as many customers as possible. Some products survive to become so-called specialty products and, if offered by a company in a geographic area, this company has pricing power and can therefore increase prices considerably again.
Example
Every several months, Blackberry brings a new model of cell phone to the market. In their introduction stage, the demand for the new technology is high and therefore these models are priced high. When competition increases when other vendors introduce phones with similar capabilities, prices drop. After several months, when another new Blackberry model enters the market, the “older” model enters the maturity stage and then the decline stage and prices drop for this model.