Understanding the Product Life Cycle

Products typically follow a pattern of demand through their life cycle. A common model to study this phenomenon is the Product Life Cycle model. This model divides a product's life cycle into 4 stages.

Development (Introduction) Stage - products in this stage are not well-known, and the technology is leading edge but untested. If you are looking for a competitive advantage that a new product provides, then you should consider entering the market at this stage. The pricing strategy of the supplier can vary. They might set prices high if research and development costs are high and there is already some demand for the product, while others may price the product low to penetrate the market quickly. As a buyer, if you have chosen to use a product in this stage, you may try to negotiate contracts that slow the broad market distribution of this product to maintain exclusivity as long as possible.

Growth Stage - products in this stage are starting to gain traction in the demand market. Pricing should stabilize as demand is more robust and suppliers can achieve some economies of scale. Profit margin of suppliers should increase as a result; ensure that some of the cost savings are passed on to you. Also, focus on product quality and consistency as the volumes increase more rapidly.

Maturity Stage - buyers of products in this stage should have most of the market power. Competitors likely have moved into the market, and suppliers are forced to reduce their profit margins. If your business focuses on cost competition, then you may focus on acquiring products in this stage of the market cycle (there are early-stage product that focuses on cost rather than new functions or superior performance). Leveraging supply competition and negotiation is key to getting the best deal for products in this stage.

Decline Stage - pricing should continue to decline in this stage, but new products and superior products may start affecting the availability of the product. You may have to negotiate with the supplier to maintain supply and start searching alternatives (either the same product from multiple sources or a substitute product that performs the same function) to reduce supply and/or operational risk.

Below is a common chart used to show the demand pattern of a product through its life cycle.

Figure 1: Product Life Cycle Diagram

The product life cycle is usually studied in sales and marketing to understand demand-side behaviour. Consumers use a mix of personal preferences and economic valuations, among other factors, to make their purchasing decisions. However, as supply-side professionals and as businesses, individual preferences should not play as large a role in purchasing decisions. Hopefully, understanding these four stages will help you strategize your purchasing and negotiating decisions.