The Product Life Cycle

 

 

Introduction        Growth             Maturity        Decline

 

This diagram is an example of what is known as the Product Life Cycle. The Product Life Cycle is a predictive theoretical model of how a successful business or product should behave in terms of sales and cash flow throughout the product or business’s lifespan.

In terms of the product life cycle’s usefulness as a strategic marketing tool, it most definitely has its limits and is considered to be only really useful in hindsight, for analysis of a particular business’s performance.

 

Product Portfolio Analysis

Product Portfolio Analysis is a marketing strategy which aims to create a variety of balanced products which have a widespread appeal and hence will be supposedly profitable. This theory is best shown by the Boston Matrix:                    

                                        HIGH                  Market Share                    LOW 

Rising Star This is a product which has a high percentage market share in a quickly growing market.	Problem Child A product which has low market share of a quickly growing market. (High Potential Growth.)
Cash Cow  This is a product which has high percentage market share in a slow growth market.	Dying Dog  A product which has low market share in a slow growth market. (Low Potential Growth)

HIGH

 

  

Market Growth 

  

 

LOW

 

 

The most important thing to realise about these two marketing strategies is that they are both useful for adding value to a company. The Product Life Cycle does this by making companies aware of the finite nature of their product. Once a company realises this they are much better equipped to continue the success of a product by avoiding ‘Determinism’ (see key terms) and hence improving their products’ lifecycle and profitability by coming up with some sort of extension strategy for that product.

 

The Boston Matrix is useful as it allows managers to plan any further strategies they may need, by organising their existing products into the categories set out in the Matrix. For example a certain company may have too many ‘Dying’ dogs and as a result invest in Research and Development in order to develop a new range of products to replace these dogs hence saving the company huge amounts of money, and improving the company’s image.

 

Marketing Planning

Now my fellow business buddies we arrive at the Marketing Planning chapter, I hope you know what’s next……. yes that’s right it’s the Marketing Mix……………..

As was mentioned previously the marketing mix is defined as: The elements necessary to successfully market a product, commonly known as ‘The Four P’s’ – Price, Place Product, Promotion. This is important guys, so listen up.

 

Price

Factors influencing price are based on supply and demand. Demand is affected by quality of product, consumer incomes, competitors, tastes and fashion. Supply is affected by costs of input (wages and raw materials), technology, and production methods. The competitiveness of the market is perhaps the most influential factor for a company deciding on a method or methods of pricing and the firm’s power to set market leading prices will depend exclusively on that firm’s market share.

 

A few examples of different pricing methods are:

Cost-Plus Pricing: Price is average cost plus a percentage ‘mark up’ for profit.

Price Discrimination: Price is raised or lowered for different people wanting the same thing.

Contribution Pricing: Price is set to cover variable costs and contribute to fixed costs until break even is reached whereby fixed cost contribution becomes profit

 

Examples of pricing strategies are:

Skimming: High price to begin with, yields big profit margins, followed by a drop in price when competitors enter the market in order to establish market share.

Penetration: Low prices set in order to increase market share.

Price Leaders: A company with high market share sets a price that smaller firms are forced to follow.

 

There are a few more of these strategies and methods but I’m a revision guide not a teacher so you should already know the others!

 

Place

Place refers to exactly where your product is going to be in order to achieve maximum consumer exposure. The Placing of your product can be vital to its overall success and needs to be somewhere where your target buyer will see it frequently. For example it’s no use trying to sell the latest most expensive Rolex in Oxfam because the people looking to buy the most expensive Rolex won’t be looking in Oxfam for it.

 

The Traditional method of getting a product from producer to buyer was:

Producer                    

Wholesaler

Retailer                      

Consumer

 

However many companies now bypass the wholesaler for cash flow reasons and some companies such as Dell, go straight from producer to consumer via the internet, a unique and interesting way of developing their own USP.

  

Product

If you don’t have a viable, sellable product then all of the other P’s become redundant and unnecessary. You must have a product which has a USP and is differentiated from the rest of the market in order for all of the other aspects of the marketing mix to fall into place.

 

 Promotion 

Once a product has been established, Promotion aims to persuade all of your potential customers to part with their cash, whilst also attempting to draw the consumer’s attention to your brand above anyone else’s. This can be done in two ways:

Above the line Promotion- Advertising through the mediums of the mass media including T.V, Newspaper and Radio adverts.

Below the line promotion- Also referred to as ‘in house’ promotion it includes methods of promotion such as merchandising, canvassing, personal selling and direct marketing.

O.K That’s the worst of it done with, just remember that the four P’s are not equally important in all situations and different circumstances call for different aspects of the mix to be given more attention than others.

 

To summarise this section, the integrated nature of any marketing decision calls for the use of a variety of different marketing strategies to be implemented in order to create the strongest possible position in the market for a particular company. REMEMBER IT !!!!!!!!!!!

 

As you already know, ‘Price’ is one of the most important elements of the marketing mix and it is also an integral part of another section of the syllabus:

 

Elasticity of Demand

One of the most important concepts of any firms pricing strategy is the relationship between supply and demand. A company needs to know exactly how the market will respond to a change in a certain product’s price, so that they can make the most out of constantly changing economic conditions.

There are two main types of elasticity that you need to be aware of for the exam, the first is Price Elasticity of Demand or PED, very important, the second is Income Elasticity of Demand, IED, also important but we’ll come back to that later.

 

So what is Price Elasticity of Demand?

PED is defined as the responsiveness of demand to a change in price. But what does it mean?

It means that it is a measurement of how much demand will go up or down if a product were to increase or decrease in price.  

The way to remember this is by this incredibly important formula:

PED = %change in Demand
           % change in Price

 

If you’re not mathematically minded don’t worry, all you have to do is substitute numbers into this formula, it’s just a matter of learning all the types of questions you might be asked concerning this formula.

 

Remember these facts and you should be fine.

Price Elastic means that a lower price will result in an increase in revenue for a particular product. This is expressed in the formula by a PED of 1 or over. (If answer is negative ignore minus sign)

Price Inelastic means that a price rise will lead to a revenue rise. This is expressed in the formula by a PED which is less than 1. (Usually a decimal. Ignore minus sign if negative) 

Here is a good way to remember it: 

Price	Demand	Revenue
£10	100	£1000
£11	98	£1078

 

 

 

 

With this product a rise in price has lead to a rise in revenue. The product is therefore Price Inelastic.                                     

Price	Demand	Revenue
£10	100	£1000
£11	90	£990

 

 

 

With this product the revenue was more when the product was at its lower price- Price Elastic.

 

Here’s an example question and answer to start you off with.

 

1. Success to A* Ltd plans to increase its prices by 15% Given that the marketing division believe hat their product has a price elasticity of 0.5, calculate the company’s revenue following the price rise. The starting price for their guide is £3.00 with a starting demand of 1,500,000 customers.

Answer:  PED = %change in Demand   
                            % change in Price                  

 Step 1: Always write the formula out as you get marks straight away just for this.            

 PED = %change in Demand   = 0.5  
                                    15                                                       

Step 2: Next step is to sub all the numbers in that you know from the question, as I have here.

Therefore:    X = 0.5                         

Step 3: This is the maths bit! As the % change in demand is unknown we replace it with an ‘X’. From here we rearrange the equation to find the value of ‘X’.

 ‘X’ = 0.5 x 15

 ‘X’ = 7.5

 PED  7.5 / 15 = 0.5                  
      

Step 4:  By substituting the value we found for ‘X ‘back into the original formula we can check that the value we have calculated is correct, in this case it is.

 

Price Increase is:                               

 £3.00 x 1.15 = £3.45                                     

              

Step 5: Now we can calculate the new price of the guide; (an increase of 15 %) and the new demand for the product; (an increase of 7.5%).                                

Demand increase is:

1,500,000 x 1.075 = 1,612,500

 

Revenue = Price x quantity               

 

Step 6: By using the formula for working out revenue, (R = P x Q), we can substitute in our values from the previous step and calculate our final answer! 

Revenue = £3.45 x 1,612,500                 

Revenue = £5,563,125

 

I can promise you that this is one of the hardest types of question on PED you are likely to get, most questions will simply ask you to work out the PED of a product by giving you some variables so basically Steps 1-4. However be prepared to answer questions like this one!

 

 

Now we move onto Income Elasticity of Demand- pretty similar to PED but with a few distinct differences.

Income Elasticity is defined as the responsiveness of demand to changes in income.

The formula for this is pretty similar to PED.   

IED = % change in Demand  
         % change in Income

 

The ‘Income’ part of Income Elasticity is referring to the Income of the population i.e. the average income of England.

If a company is able to calculate IED then they will be able to predict exactly how much a change in income will affect demand for their products.

When thinking about IED you need to remember that goods, services and products sometimes be classed as superior or inferior.

• Superior goods are goods which- when consumer income falls- demand for these products fall. They are also known as luxuries and are generally products which consumers feel are not necessary and do not buy because they have less dispensable income. A good example is a top of the range Jacuzzi bath or an expensive Caribbean cruise. 

• Inferior goods are goods which- when consumer income rises- demand for these products fall. The demand falls for these products because consumers can afford to buy higher quality alternatives because they have more dispensable income. An example of an inferior product would be all ‘Economy’ ranges at Tesco or ‘Smart Price’ Ranges at Asda.

  

So Remember:

Income Inelastic products are products where demand for it is not affected by changes in income and these products are generally necessities such as petrol or addictive products such as alcohol and cigarettes.

Income Elastic products are products where demand is affected by changes in income and this is true of most products especially Superior and Inferior goods.