At what point does a company decide to pull its product line from the market? Are there signs to signify it’s time to scale back production and move forward with that new product offering?
Or, should companies instead assess where the product is in its life and look for any signs that the product might rebound? Most are surprised to hear that a product can rebound once it enters the fourth and final stage of its life. This is because conventional wisdom states that the fourth stage is the final stage of Product Life-Cycle Management or PLCM for short.
Surprisingly, there’s another less commonly understood stage of PLCM and if properly managed, it can actually surpass any previous stages in terms of gross profit and market dominance.
We’ll define the four stages of PLCM and explain what signs a company should look for when anticipating the fifth stage. It doesn’t happen all the time, but when it does it leads to significant returns. Afterwards, we’ll outline three steps to locking in demand for the product line in its fifth stage.
STAGES OF PLCM
Product managers and marketing professionals are well aware that PLCM defines four stages of a product’s life in its market. The first is the introduction stage. The second is the product’s growth stage. The third is the product’s market saturation, or peak stage. Finally, the fourth is what’s commonly referred to as the final decline stage.
It’s during the decline stage that a product offering has run its course. Companies then make preparations to withdraw the product offering. Most have laid the groundwork for their new offering during the previous product’s market saturation point. Timed perfectly, and the company can withdraw its product offering to coincide with its new product introduction, enabling it to reduce its raw material and finished inventory counts.
However, the fifth stage is always a possibility and if attained, can lead to substantial benefits. Here is a view of the five stages of product life-cycle management in graph format.
1. Introduction Stage: A product’s introduction stage is marked by high prices due to high manufacturing costs that correlate to low production volumes. In addition, companies must cover high design costs and try and recoup some of their research and development expenditures. This translates into a higher initial market price for the product offering.
2. Growth Stage: As more and more customers accept the product offering, the company’s manufacturing volumes increase and its costs decrease. Market adoption is fully underway and prices come down due to increased competition.
3. Market Saturation Stage: At this point the product has reached its peak in the market. Market saturation occurs as the market has become inundated with excessive competitors, each with their own product offering. It’s during this stage that profit margins stagnate.
4. Decline Stage: As more and more competitors leave the market, the product’s pricing comes down. Margins decline further as customers start to look for new product offerings. It’s this fourth stage that marks the end for most product lines.
5. Rebound Stage: The most obscure stage is the fifth stage. Sometimes referred to as the “rebound” stage, it’s never a given and often an obscure occurrence. This is when the product offering has suddenly become rejuvenated. Since there are few companies able to offer the product, those that do achieve significant market dominance and consequently, very high profit margins.
EXAMPLE OF THE FIFTH STAGE
So, what examples are there of the fifth stage? In order to answer this question, think of vinyl records. Think of how they were replaced by the compact disc, or CD, during the 1980s. Most immediately assumed that the days of vinyl were over, but it never happened. There was a sudden decline, and eventual end of life period, but eventually the product achieved stability and rebounded to what it is today.
Today’s vinyl record manufacturers are enjoying a rebirth in their product offering and have backlogs on demand of up to six months!
In fact, some of them never went anywhere, and never contemplated replacing their iconic product offering.
There are other examples of product lines that seemed to have their best days behind them, only to suddenly rebound and increase in popularity. While rare, it does happen.
In most instances it occurs on a much smaller scale than our aforementioned example of the vinyl record. Companies in multiple industries have decided to stay the course, and continue to offer their product line to a customer base that often can’t seem to get enough. Sometimes it’s only offered to a select few customers.
However, with no competition, companies can dictate pricing and ultimately, maximize their gross profit on sales.
LOOKING FOR THE ELUSIVE FIFTH STAGE
What should companies look for when it comes to the fifth stage? Simply put, companies must be market experts first and use that expertise to determine where their product is going. They must clearly understand their customers’ requirements and be willing to entertain the idea of continued supply.
Here are some simple steps to help determine whether your company should ever entertain becoming a limited supplier for a given product line.
1. Determine Existing Demand: What are your customers saying? Are some within your market less willing to change to your new product offering and if so, why? It’s essential to define your existing demand for the outdated product line. Take the time to determine which customers still anticipate buying the product. There are all kinds of reasons why a customer may be reluctant to accept a new product offering. Don’t simply chalk it up to a fear of change. Instead, determine what demand remains.
2. Quantify the Value of Demand: It is one thing to determine how much customers are willing to purchase, but it’s something else entirely to quantify that demand. Be sure to quantify the gross profit of remaining a viable source for the product. How much will the company make if it continues to provide the product? For how long will these profit margins exist?
3. Secure Long-Term Contracts: If certain customers still want that outdated product offering, then they should be willing to sign an agreement or contract. Otherwise, they risk facing supply issues. The first step is to determine your market’s demand. The second is to quantify that demand in terms of sales or gross profit. The third is to lock up that demand for as long as possible.
Remember, your company is likely going to be the only supplier the market has. That is of course if you’ve done your homework. If you’re willing to continue to offer that product, then those customers who need it must be willing to commit themselves to what you have to offer.
Not all opportunities will be as obvious as our aforementioned example of the vinyl records.
Most opportunities will be rather obscure and relegated to a select few customers who refuse to change. Your company can assume a position of control, and lay claim to this unfettered demand for your product offering.
Dependable, long-lasting, custom-made air-cooled heat exchangers by Smithco Engineering.
For a quote or for expert help regarding to your industrial operations, call toll free at 1-888-317-8959 ext.26 today.