Product

The Product life cycle (PLC) shows the different strategies in the life of a product and the sales that can be expected at each stage. There are a few stages in this cycle:

Development: the product is being researched and designed. Prototypes and models are made and these undergo a series of tests so that the business can see how it will behave once it is in the hands of a customer. A large number of products at this stage will fail. At this point, costs are very high and no revenue is generated as the product is still not available at the market.

Introduction: the product is launched. Sales are slow-growing and promotional and distributional costs rise. Prices might be set high in order to cover for these costs, or they might be set low in order to break the market.

Growth: sales begin to grow as the product is established and the customers are fully aware of the product, and the costs are likely to decrease. At this stage, the product becomes profitable, and it is likely the competitors will try to launch substitutes, thus business needs good promotion and pricing strategy.

Maturity and saturation: the growth in sales gradually levels off. The market slowly becomes saturated as new competitors enter the market. This will force some companies to exit the market or extend the life of their product.

Decline: for the majority of products, sales eventually decline, usually due to the change of customers’ tastes, new technology or introduction of new products. The product at this point can still be profitable, if little is spent on promotion and production, and a relatively high price can be charged.

Extension strategies

Extension strategies are used by businesses to extend the life cycle of their products. This is because the product is most profitable during the mature period. In order for them to keep the product in that stage as long as possible, businesses launch an extension strategy as soon the product enters the saturation stage and the sales start declining.

Extension strategies can involve:

Finding new markets for existing products.
Developing a wider product range.
Gearing the product towards specific target markets.
Changing the appearance/packaging/format/design of a product.

The relationship between PLC and cash flow

Before product launch, a business will spend to develop the product while no money is coming into the business from sales, therefore making cash flow negative. At launch, at point A, a product begins to sell. Cash flowing into the business is likely to be smaller than the cash flowing out since the business might be spending a lot on promotion and distribution. In the growth period, as the product becomes more established, the revenue will be greater than the spending of the business, which is the point B. The sales rapidly increase, making the gap between the revenue and spending bigger and therefore making cash flow positive. Cash flow will be at its highest during the mature period, as the revenue the product earns will be the highest. During the decline period of PLC, the sales decrease and so does the cash flow.

BCG Matrix

Boston Consulting Group Matrix (BCG Matrix) is used in order for businesses to analyse their product portfolio better. The model takes two things into consideration when analysing how well managed the product life cycle is:

Market growth: How fast is the market for the product growing?
Market share of the product: How strong is the product within its market?

Using these criteria, the products of a business can be positioned into one of these four categories:

Stars: this is a product with high market share in a growing market, therefore it is profitable. However, the business will need to invest further in the product as it needs to cope with the growing market and growing competition, which will increase promotion costs. Due to all these costs, the cash flow might be nearly zero with a tendency of increasing in the positive direction. Connecting this model to the PLC, we could expect to see this product in the growth period.

Cash cows: this is a product with high market share in a slow growing market, thus it is well positioned in the market. The customers are aware of the product, it is highly profitable and cash flow is positive, as there is no need for oppressive promotion strategies any more, and therefore costs decrease. However, due to the slow growing market, business needs to employ an extension strategy. The business wants to milk the cash cow, as this is when most of the profits are made. Connecting this model to the PLC, we could expect to see this product in the mature period.

Question marks: these products have low market share in a fast growing market. This product is not the market leader but rather a market follower. Therefore, the business has to decide whether or not such a product is worthwhile investing in and if it should be withdrawn from the market. At this point, the product is not profitable due to its low market share and the cash flow is likely to be negative. We would expect this product to be in the introduction period of the PLC.

Dogs: these products have a low market share in a slow growing market. This means that it is not likely that there will be an increase in sale of the product. The cash flow at this point is positive as not a lot is invested in a product. These products are in the decline period of the PLC.

Aspects of branding

Brand awareness: how much people know and identify the brand by its branding an products.

Brand development: The result of the efforts that the company makes to improve the branding.

Brand loyalty: the extent to which participants are tied to the brand.

Brand value: the extent to which participants consider the brand name when buying a product based on its reputation.

The importance of branding

A brand a name, term, sign, symbol, design or any other feature that allows consumers to identify the goods and services of a business and to differentiate them from those of competitors.

When developing a brand, it is important to find a Unique Selling Point (USP). The USP is a feature of a product that makes different from other products in the market and what makes people want to buy the product.

There are several types of brand:

Manufacturer brands: brands created by the producer of goods and services (e.g., Gillette razors or Samsung laptops).

Own-label brands: these are products which are manufactured for wholesalers or retailers by other businesses, but the wholesalers and retailers sell the product under their name (e.g., Albert Heijn does not produce AH pasta or AH beans, but sells them).

Product (individual) branding: businesses can brand individual products and give them individual brand names (e.g., a large number of washing powder brands sold by the same producer Procter & Gamble: Ariel, Bold, Tide, etc.).

Family branding: family branding is when a business has a brand name which includes a number of different products (e.g., Mars chocolate bar has its own energy drink as well).

Company (corporate) branding: this is when a business’ name is used as brand name. This is similar to the own-label brands, but in this case the business that sells and produce the products names the brand after the name of the company.

Branding is used in order to: