The product lifecycle traces the evolution of a product in the marketplace from its introduction to demise in 5 stages. A good understanding of the product lifecycle can add dimension to your revenue management and pricing strategy, including a better understanding of profitability through optimized discount spending, pricing positions, fully leveraging your portfolio and allowing you to exploit channel opportunities.
Using the product lifecycle, companies can build a strategy for their offerings that is based on the market conditions they foresee through the lifecycle prism.
What is the Product Lifecycle?
The 5 Stages of the Product Lifecycle
Focus: Proving the product
The development stage is when a product is first introduced into the market, and a company looks to develop a consumer base. The challenge is to convince customers that they need this product enough to purchase it. This stage is known as the 'proof of concept' wherein the company is trying to prove the product can sell. This stage often comes before the product has been technically proved, and the company is looking to attract the 'innovator' class of customers to validate its ideas.
Focus: Covering costs and managing margins
The introduction stage is when the product is launched into the market. In this stage, the company is spending vast amounts of time and money marketing the product and attracting the 'early-adopter' consumer. Success in attracting these customers will set the groundwork for the growth stage and the 'early majority' that buys into the product.
From a revenue perspective, the sales at this stage are low, and costs are high. The company's focus should be to cover costs and manage its margins to ensure survival.
Focus: Differentiation based on premiumization and effective discount strategy, and move towards value pricing
In this stage, real growth in sales and profitability start to show. Competitors have seen the proof of concept and now begin to enter the market with their comparable products. Competition and the need for product differentiation begin to grow. Industry-wide, profitability peaks during this stage while sales keep growing into the maturity stage. Costs start going down, and prices start going up, creating better margins and attracting even more competitors to enter the market.
It is at this stage that the company should have a clear idea of its cost and be able to do cost-plus pricing effectively. As competition increases, the company should be looking to ensure it has an effective discount strategy in place.
Industry growth and increased competition offer a chance to build on brand recognition, expand the company’s portfolio, and consequently charge a premium. In doing so, the company is taking the first step towards value-based pricing, and companies should start building these brands, which they can leverage at the maturity stage.
Maturity & Saturation Stage
Focus: Leverage Product portfolio, channel opportunities, optimize discount strategy and value pricing
This stage is when sales growth has stopped, and emphasis shifts to share and profitability. Revenue management strategy from this stage onwards becomes critical to the company's survival. The company should be actively looking to leverage its portfolio and make sure pricing and discount schedules are optimized to take advantage of competitive weaknesses driving profitability and revenue growth.
In this stage, the company should also be looking to optimize prices across channels and focus on a strategy that captures opportunities in channels that might yield higher profitability in the future, e.g. online for many industries.
Focus: Targeted price increases to improve industry-wide margins and rate mix through best-in-class price optimization driven by analytics
The decline stage sees the industry facing falling sales and decreased profit margins. Competitors start to exit the market and create an opportunity for targeted price increases. Revenue and profitability growth are linked to gaining market share with the right product rate-mix because the market growth trend is now negative. So, the company wants to gain share in higher profitability segments and shift consumers to buying SKUs with higher profitability. They also want to have a clear idea of which brands/SKUs they can take price increases on to improve margins without hurting market share. If a company's revenue management capabilities have not evolved to best-in-class by this point, it will be tough for the company to make sure its product survives.
Are You Ready for
Product Lifecycle Challenges?
The Business Maturity Model
An excellent way to assess a company's growth from a revenue management perspective is to look at its revenue and pricing strategy through the lens of the maturity model. A startup is focused more on the top line, while more prominent companies should concentrate on optimizing smaller items to yield higher aggregate profitability. In this sense, it is critical for a company's revenue management strategy to evolve with it.
5 stages of the Revenue
In the chaotic stage the company does not have a portfolio of products yet and is still discovering its product's real market value.
In this stage, the company is focused on sales and product penetration within the market. The company is looking at the market to assess pricing for the product and setting up the supply-chain and growing product reach and visibility.
In the defined stage, the company should have a defined pricing strategy based on cost-based pricing. It has a clear idea of what its margins look like and its revenue strategy is based on improving margins and moving volume to products with higher margins. It is critical that most startups and products reach this stage as early as possible in their product lifecycle.
At this point, the company has transitioned to value-based pricing. It has an established portfolio that it is leveraging to target different customer segments based on the value they associate with the product. The company is effectively using discounts in the periods of the year where it gains the most volume and has established premium brands that can command higher prices and profitability.
The company has a consistent channel pricing strategy, e.g., online and retail, to ensure the messaging is consistent and that the margins and profitability are compatible and optimized.
The company is using data and advanced analytics to focus on not just effective discounts and pricing but also using rate-mix to try and build volume and share in customer and SKU segments that offer higher profitability. It is working to transition existing customers from lower margin SKU and product types to higher ones. It is actively examining cross-price elasticity vis-à-vis competitors to assess the impact of its pricing decisions to have a clear idea of who it will lose share to and gain share from and in which SKUs as a result of these decisions.
It has also optimized channel pricing to ensure its portfolio placement across channels is consistent. The company should also be optimizing its channel mix by moving its focus to channels that have higher profitability.
The Bottom Line
A company can achieve significant improvements in its profitability if it moves to identify opportunities in portfolio positioning, channel, pricing and discount promotions and optimizes its strategy accordingly. The key is to ensure a clear understanding of your product, where it lies in the product lifecycle and making sure your revenue management capabilities grow as your product evolves.
How to Assess Your Lifecycle Stage
A company should evaluate its revenue management in these four key areas:
- Optimized Price Positions (Price)
- Improve spend efficiency (Discount Strategy)
- Leverage your portfolio (Product)
- Capture channel opportunity (Channel)
ABOUT THE AUTHOR Farhan Ahmed is an Analyst at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Farhan at [email protected]