Product Life Cycle: What It Is, the 5 Stages, & Examples

Product Life Cycle vs BCG Matrix

The 5 Stages of the Product Life Cycle

The 5 Stages of the Product Life Cycle

1. Development Phase of the Product Life Cycle

The project is still able to be iterated. You can have great expectations for it, but before the product starts generating revenue, you still need to improve your proposal, carry out tests, validate the hypotheses, and make necessary changes.

Development phase of the product life cycle example - legging for dogs

2. Introduction Phase of the Product Life Cycle

Proof: you only need to turn on the TV for a few minutes to see ads for a new flavor of soda, a different motorcycle model, a smartphone that promises new and superior features, etc.

3. Growth Phase of the Product Life Cycle

4. Maturity Phase of the Product Life Cycle

For example, Coca-Cola doesn’t leave the media even though it “doesn’t depend on marketing.” The company understands that brands are not forever, being subject to market instabilities and behavioral changes in the audience.

5. Decline Phase of the Product Life Cycle

Practical Examples of the Product Life Cycle

The Product Life Cycle of Havaianas

  • Development: the traditional flip flops were inspired by Japanese sandals made of wood or straw; in Brazil, rubber was selected as the material because it was believed to have the most acceptance with the audience
  • Introduction: deliberately or not, its introduction in the market was a great success with classes C, D, and E
  • Growth: Havaianas flip flops were in the growth stage for most of their existence, eventually dominating over 90% of the market for flip flops
  • Maturity: maturity only came in the ’90s, with new product design, aimed at a different audience, and great marketing investment, especially with the now-classic TV ads that were fun and always starred famous actors
  • Decline: up to this moment, there are no signs that Havaianas flip-flops may go through this stage in the short term

The Product Life Cycle of Coca Cola

  • Development: very little is known about the development of Coca-Cola and how they created the mysterious formula
  • Introduction: by 1886, the year of its foundation, the brand already seemed to have the right project
  • Growth: less than ten years after its launch, Coca-Cola was already consumed in all the U.S. states
  • Maturity: it’s impossible to say exactly when the brand reached maturity, but it’s safe to say that it has spent most of its history until now in this stage
  • Decline: since 2012, the net operating revenue of Coca-Cola has fluctuated towards decreasing; while a small decrease is within what’s expected for the maturity stage, investments in marketing and new products must continue

Business Life Cycle

The business life cycle is the progression of a business in phases over time and is most commonly divided into five stages: launch, growth, shake-out, maturity, and decline. The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars or various financial metrics. In this article, we will use three financial metrics to describe the status of each business life cycle phase, including sales, profit, and cash flow.

Graph of the Business Life Cycle Stages

Phase One: Launch

Each company begins its operations as a business and usually by launching new products or services. During the launch phase, sales are low but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses in this phase.

In fact, throughout the entire business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between sales growth and profit growth. This lag is important as it relates to the funding life cycle, which is explained in the latter part of this article.

Finally, the cash flow during the launch phase is also negative but dips even lower than the profit. This is due to the capitalization of initial startup costs that may not be reflected in the business’ profit but that are certainly reflected in its cash flow.

Phase Two: Growth

In the growth phase, companies experience rapid sales growth. As sales increase rapidly, businesses start seeing profit once they pass the break-even point. However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the growth phase becomes positive, representing an excess cash inflow.

Phase Three: Shake-out

During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market. Sales peak during the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out phase. This growth in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit.

Phase Four: Maturity

When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement.

However, it’s important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace.

Phase Five: Decline

In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this phase, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Firms lose their competitive advantage and finally exit the market.

Corporate Funding Life Cycle

In the funding life cycle, the five stages remain the same but are placed on the horizontal axis. Across the vertical axis is the level of risk in the business; this includes the level of risk of lending money or providing capital to the business.

While the business life cycle contains sales, profit, and cash as financial metrics, the funding life cycle consists of sales, business risk, and debt funding as key financial indicators. The business risk cycle is inverse to the sales and debt funding cycle.

Corporate Funding Lifecycle

Phase One: Launch

At launch, when sales are the lowest, business risk is the highest. During this phase, it is impossible for a company to finance debt due to its unproven business model and uncertain ability to repay debt. As sales begin to increase slowly, the corporations’ ability to finance debt also increases.

Phase Two: Growth

As companies experience booming sales growth, business risks decrease, while their ability to raise debt increases. During the growth phase, companies start seeing a profit and positive cash flow, which evidences their ability to repay debt.

The corporations’ products or services have been proven to provide value in the marketplace. Companies at the growth stage seek more and more capital as they wish to expand their market reach and diversify their businesses.

Phase Three: Shake-out

During the shake-out phase, sales peak. The industry experiences steep growth, leading to fierce competition in the marketplace. However, as sales peak, the debt financing life cycle increases exponentially. Companies prove their successful positioning in the market, exhibiting their ability to repay debt. Business risk continues to decline.

Phase Four: Maturity

As corporations approach maturity, sales start to decline. However, unlike the earlier stages where the business risk cycle was inverse to the sales cycle, business risk moves in correlation with sales to the point where it carries no business risk. Due to the elimination of business risk, the most mature and stable businesses have the easiest access to debt capital.

Phase Five: Decline

In the final stage of the funding life cycle, sales begin to decline at an accelerating rate. This decline in sales portrays the companies’ inability to adapt to changing business environments and extend their life cycles.

Understanding the business life cycle is critical for investment bankers, corporate financial analysts, and other professionals in the financial services industry. You can benefit by checking out the additional information resources that CFI offers, such as those listed below.

Source:

https://neilpatel.com/blog/product-life-cycle/
https://corporatefinanceinstitute.com/resources/knowledge/finance/business-life-cycle/
https://emeritus.org/in/learn/different-stages-of-product-life-cycle/