Page 3: Purpose of the product life cycle
Understanding the life cycle of a product is important to a business for a number of reasons. One important reason is that understanding the PLC will help a business to manage its cash flow. In the development stage money will be spent on developing the product with no sales to cover the cost of that development. When the product is introduced into the market the business will probably incur significant costs in marketing campaigns. Sales revenue in the introductory stage is unlikely to cover costs. As the product moves into its growth phase, the cost of promoting the product should decrease as cash flow from product sales increase and the business can see a profit. Profits should continue through maturity until sales fall as the product begins to decline.
In the sport and casual wear sector changing fashions will also affect the life cycle of a product. JD buys branded products such as Nike and adidas six months before launch so they usually have a pre-determined price. In this price and fashion sensitive market, prices may have to change even on the day of the launch because of other retailers’ pricing strategies.
Monitoring the life cycle will help to identify when products should be replaced or renewed. JD is subject to seasonal trends in its fashion and outdoor wear whereas products such as Nike Air Max 95 trainers will have a longer ‘life’. Consequently, stores are allocated the product based on individual demand.
A business can extend the PLC by changing its pricing strategies, for example ‘buy one get one free’ offers or free postage and packaging to encourage more sales. Other pricing strategies can be used at appropriate stages of the PLC, for example a business can use price skimming when the product is first launched by charging high prices. The aim of skimming is to gain high profits in the early stages of the PLC. Skimming is successful when the product is new and different so that consumers will pay a high price for being the first to have it. The opposite strategy to skimming is termed penetration pricing, this means setting a low price when the product first enters the market. The aim is to get the maximum possible market share quickly and to shorten the launch stage of the PLC.