What is the product life cycle?
There are many different models that describe the product life cycle, some with four and others with 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. decline
Effect on prices
Introduction
During the introduction stage of a product, the price is usually higher. This strategy has the goal of recouping 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 strive to have the latest technology at all times and are willing to pay dearly for it.
Increase
During the growth stage, competition has entered the market by increasing the available quantity of a certain product and thus increasing the supply. With increased competition, prices are set at a lower level to be competitive in the market. Also, companies have recouped the costs of developing successful products and therefore can start charging lower prices and still make a big profit.
Maturity
The maturity stage of a product usually eliminates the companies that charge the highest price for the given product and thus further increases low price competition and causes downward pressure on prices. Between companies, prices usually stabilize and most companies offer a similar price. During the maturity stage, prices among competitors typically 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.
decline
During a product’s decline stage, prices fall as the remaining companies in the market try to reach as many customers as possible. Some products survive to be so-called specialty products and if they are offered by a company in a geographic area, this company has pricing power and can therefore raise prices again.
Example
Every several months, Blackberry releases a new model of cell phone on the market. In its introduction stage, the demand for the new technology is high and therefore these models command a high price. When competition increases when other vendors introduce phones with similar capabilities to the market, prices go down. 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.