When it comes to maximizing gross profit and pricing on a given product offering, entrepreneurs must be well versed in product lifecycle management.
Every entrepreneur or small business owner must be well versed in the four stages of product life cycle management to start a business avoiding misconceptions and mistakes. In essence, the product life cycle refers to the useful life of a product within its industry or market. Every product goes through these four stages until its eventual end of life.
Why is it Important to Understand Product Life Cycle Management?
When companies look to maximize their gross profit on a given product line, what’s the most important piece of information they need? Well, first and foremost, they must know the market influencers and how they play a role in market pricing. This involves understanding the company’s main competitors, the pricing the customers are willing to purchase at, and the demand for the given product.
Understanding the market is one aspect, but understanding what phase of life the product is in is essential to maximizing market share, pricing, and gross profit. It makes no sense for companies to price their product offering too high or too low. Too high and there are not enough sales. Too low and the gross profit generated isn’t enough. Herein lies the importance of understanding a product’s life cycle.
What are the Four Stages of Product Life Cycle Management?
Each of the following phases requires a different approach to market as well as a different pricing and marketing strategy. In each case, companies match the phase to their appropriate market approach. In doing so, they aim to maximize gross profit and increase or maintain market share until the end of the product’s life.
1. Introduction Phase: In this stage, pricing is typically higher as consumer demand is low until the market fully accepts the new product offering. Customers must be incentivized to purchase. In addition, since volumes are lower, manufacturing costs are higher and pricing is higher as a result.
2. Growth Phase: As the market and customers start to purchase the product, volumes increase and prices drop because of lower costs and increased competition and demand. However, despite the drop in pricing, companies still achieve higher gross profit returns than during any other phase of the product’s life.
3. Maturity Phase: At this point, customers have fully accepted the new product offering and pricing has stabilized. However, the market and customers are looking towards the next product offering. In this phase, the market becomes saturated with competitors and gross profit starts to decline.
4. Decline Phase: This is the end of the product’s useful life in the eyes of customers. Companies are still able to derive some profit, but it’s much lower than at any of the previous three phases. Production volumes drop, costs increase and gross profit margins become tighter.
For entrepreneurs and small business owners, understanding these four phases is essential to ensuring their product offerings are in line with market demand. Each of these phases requires a specific approach to market and a different advertising and pricing strategy. Understanding the limitations of each phase helps to maximize gross profit and market share.