What is the revenue based on
Plan the product life cycleThe phases in the product life cycle
The phases at a glance
The product life cycle shows the course of sales or turnover, as is typical for many products. It becomes clear that this course, the curve for the product life cycle, can be divided into several phases. A distinction is made between these phases:
- Saturation (stagnation)
- Decay (decline, degeneration)
The decisive factor for classification in a life cycle phase is how much sales, turnover or profit change compared to the previous year or the previous quarter (depending on the selected time frame); this also corresponds to the growth rate in sales or turnover. Figure 5 shows the division into phases using the product life cycle model.
In addition to the level of sales and the change in sales compared to the previous period (growth rate), there are other characteristics that are typical for an individual phase:
The market launch begins when the product enters the market. That's when it can be bought by potential customers. Some products are advertised even before they enter the market; sometimes even pre-orders can be made. These are special marketing strategies to assess the subsequent success of the market launch and to achieve faster acceptance.
This market launch phase ends when it becomes apparent that the product will be accepted by the potential target group and there is a rapid increase in sales. This point in time is often defined by the fact that the sales break-even point is reached; the so-called break-even.
With Break even or Break even point is the point in a sales-profit diagram at which the profit is currently 0. That's why it's called Breakeven point. In addition to sales, the price of the product, variable costs and fixed costs are included in the calculation of profit. The formula is:
Break even or even breakeven point
= Sales x price - sales x variable costs - fixed costs
If the price, variable and fixed costs are given, the sales that lead to profit 0 can be calculated:
Sales break-even point = fixed costs / (price - variable costs)
At the breakeven point, the total contribution margin corresponds to the fixed costs. With this paragraph, the unit profit covers the fixed costs.
With the Break-even analysis it can be checked what effects changes in the parameters of sales, price, variable and fixed costs have on profit and the breakeven point. This makes it possible to assess whether and under what conditions a product or business model is profitable and economically viable.
There is no guarantee that a product will move from the market launch phase to the growth phase. Many products are a flop because it is foreseeable that they will not break even or that the sales, turnover and profit achieved are well below expectations. Some experts say that around 70 percent of all new products launched on the market are withdrawn from the market during the launch phase.
Whether the product gets into the growth phase is a critical moment. It is influenced by numerous factors. In particular, this includes: product features, customer requirements, benefits for customers, customer acceptance, competition, market launch strategy of the provider and its resources for market and customer development.
The growth phase in the product life cycle begins when a profit is made with the product and sales and revenues increase - to the extent that the increase actually increases, at least not decreases. Market volume, sales and turnover are growing strongly. In this phase, more and more customers buy, other target groups are reached, the product prevails over previous products or alternative conventional solutions. Depending on the product and technical lifespan, growth is made up of sales to new customers, expansion and replacement procurement.
In this phase at the latest, other competitors can enter the market and offer comparable products. The entire sales in the market are divided among several competitors. For the individual company, this can still mean an increase in sales and turnover, because the market is growing as a whole.
The growth phase ends when the growth rates decrease. Total sales and turnover are still increasing, but no longer as strongly. This can be formally expressed as follows: If the sales or turnover is a function of time, then the sales / turnover has reached its turning point, the marginal sales / marginal turnover (first derivation) has reached its maximum. This is shown in Figure 6.
Markets also mature and reach their maximum absorption capacity in this phase. This means that hardly any further customers can be won with the product in question in this market. The maturity phase is a transition phase between strong growth and market saturation. During this time, companies, marketing and sales can realign themselves. Because now you have to take measures in order not to lose any market share in the competition. Providers can only grow if they take customers away from their competitors. If no significant sales increases are actually possible, the market is saturated.
This phase of market saturation or stagnation of sales and turnover is often characterized by cutthroat competition. Vendors are streamlining to reduce product costs and offer lower prices. With this you want to get market share from your competitors. It is no longer attractive for individual providers to offer the product below a price and sales limit. You are leaving the market. Others are bought by competitors.
In order to lengthen the saturation phase and to be attractive in the competition, some manufacturers are revising their products in order to better differentiate and differentiate themselves from the competition. These revised products are also known as product relaunch or facelift. Example: The VW Golf Generation 7 was replaced at the end of 2016 by a new model called "Facelift 7". In its new products, VW is increasingly focusing on the “Connected Car” trend (mobile communications and internet connection in the car) and is modernizing the design at the same time.
How long the saturation phase lasts depends on when a successor product is introduced, what the technological development is like and which market and which product level is being considered. If, for example, the market in Europe is considered for the product category "cars with gasoline combustion", then this market has been in the saturation phase for many years - until it is replaced by other mobility concepts such as electric vehicles, car sharing or car hailing (the business model "Uber") will be replaced at some point.
If you look at a single product such as the VW Golf and its model series, after a phase of maturity and stagnation, at some point you can see a significant decline in sales and revenue. This results from the fact that competitors have launched new and more attractive car models on the market and it is becoming increasingly difficult for the company to sell its own product, which is outdated from the customer's point of view.
Most providers have prepared for this phase and replace their old product with a new one in good time. Shortly after the expiry phase begins and the decline in sales becomes measurable, the providers bring the successor product onto the market (see Figure 7). They developed that with foresight. Exception: the provider decides to exit this market.
Factors influencing the phases of the product life cycle
How long a phase in the product life cycle lasts varies greatly from product to product and from industry to industry. Many influencing factors play a role:
- Product, its features and properties, as well as the price
- Target groups and potential customers, their requirements, expectations and possibilities
- Marketing and sales and their actions and measures to make the product known and to enforce it against alternative offers
- Framework conditions such as economy, law, politics or social trends
- Competitors who offer comparable products or alternative solutions
Product planning is based on the product life cycle
If the course of the product life cycle and the duration of the individual phases can be estimated, then companies, product management, marketing and sales can intervene through their actions and measures in such a way that corporate goals such as increased sales, increased market share, profit optimization or increased cash flow can be better achieved. Because the specialist departments can take appropriate measures for the respective phase. Examples are:
- With the market launch, the product must be advertised more intensively; it takes investment in marketing.
- Marketing expenses can be reduced during the growth phase. The profit can be used to develop product variants.
- In the maturity phase, the product variants are brought onto the market, products and prices are differentiated. This allows new target groups to be reached and the growth of the market is stimulated again.
- In the saturation phase, costs and product prices are reduced. Investments are made in sales and marketing in such a way that the Unique Selling Proposition (USP) of the product is emphasized against competitive offers. Product and price differentiation as well as advertising are designed in such a way that market shares are not lost, but gained. Successful products are listed as cash cows.
- In the expiry phase, all investments in marketing and product differentiation will be stopped. Instead, the successor product that is now being introduced will be advertised. Prices are set in such a way that the sale is possible at the optimal price so that all warehouses are cleared.
It is seldom possible to predict whether sales figures will actually develop this way in the future. A prognosis based on past experience is possible for individual products of the company. In addition, the introduction of the successor product actively determines the time and course of the expiry.
This active design of the product life cycle is more difficult for a manufacturer-independent product category, a product type or an industry. Because here the many influencing factors mentioned and the actions of the competitors play a decisive role. Therefore, in this case, a comprehensive market analysis is carried out for forecasts. There you will find forecasts that are based on professional assessments or that represent different developments and scenarios. Figure 8 shows this for the heat pump product category.
Assignment to the phase in the product life cycle
Check for your products which phase of the life cycle they are in. Compare the sales figures for the last few years or quarters. Compile the paragraph numbers in the following Excel templates.
Create a phase-oriented action plan
Then develop a special product plan and marketing plan for selected products - adapted to the phase in the product life cycle. In particular, check:
- How satisfactorily are new products that were launched on the market last year developing?
- How can products that are in the growth phase also survive the competition in the maturity and saturation phase?
- When can a successor product be launched on the market for products in the saturation phase?
- Which measures are necessary or possible to increase the profit for products in the saturation phase?
- How is your company's product range divided into the individual phases?
- How many products do you have in each phase?
- Which turnover, which contribution margin and which profit is achieved in each of these categories (phases)?
- What proportion of your company's sales or turnover is in which phase?
- Does your company have the resources to keep introducing new products and successor products to the market and to look after a "mix" of products across all life cycle phases?
For your individual planning, use the content and templates from the manual chapters product planning, marketing planning, service engineering and value analysis.
Develop scenarios and alternative action plans
Use the market analysis to assess possible developments in the market and thus in sales and the product life cycle for your products and product categories. Develop scenarios and create catalogs of measures for the respective scenarios in order to be able to react to the development in good time or to take influence. Summarize in the following template:
- Which scenarios for market development and sales and turnover do you think are possible for your product?
- How do you want to prepare for these scenarios and developments?
In the following section of this manual you will find some examples of products and their life cycles and how they are represented and described. The examples show in particular which questions can be answered with the course of a product life cycle and which activities in product management, marketing and sales can or should be carried out in the individual phases.
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