Marketing 2

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PRODUCT LIFE CYCLE

Why are New Products Important?

Companies are ever-evolving. The primary way that companies make changes is by offering
“new and improved” goods and services to customers. Companies seek to improve their current
products for numerous reasons: a simple point of corporate pride, to be consistent with an image
of being innovative, as an effort to better satisfy current customers or attract new customers, or to
stave off competition.

Change is inevitable. Change is good. It’s been shown that new products increase a company’s
long-term financial performance and the firm’s value.

How Does Marketing Develop New Products for Their Customers?

Top-down: The process of developing new products depends first on a company’s culture. Some
companies take a nearly exclusively top-down approach, beginning with idea generation,
proceeding to design and development, and then commercialization. This approach is found
frequently among companies with strong engineering orientations, pharmaceuticals and bio-
medical firms, financial services, and many high-technology companies. The approach follows
the build a better mousetrap philosophy. A top-down approach is also referred to as the inside-
out approach because the idea comes from within the firm and the feedback is received later in
the process from outside sources.

Bottom-Up: The opposite approach is referred to as “co-creation” (with the customer).

Figure 1: New Product Development Process

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For most products, the new product development process is complicated and it does not follow a
straight path through the steps. The entire process requires a great deal of refinement, including
winnowing of ideas, and tweaking them in-house. In the early stage of idea generation,
knowledge of customer needs and wants interacts with corporate and marketing strategies to see
what potential new products make sense for the firm. Marketing research should also be involved
in all the refinement phases and in the decisions about the marketing mix that must be made as
the launch approaches. All the marketing components are treated holistically from the beginning
of the process till the launch, thus, as the product concept is refined, so are decisions about retail
outlets, price points, etc., in order to offer the customer a consistently positioned product.

What is the Product Life Cycle?

The product life cycle is a popular metaphor in marketing to describe the evolution and duration
of a product in the marketplace. The stages within this life cycle are market introduction, market
growth, maturity, and decline. Sales and profits behave predictably during the different phases,
and the marketing actions that are thought to be optimal during each phase are also clearly
prescribed.

Figure 2. The Product Life Cycle (PLC)

Figure 2 displays the product life cycle as well as the profit and sales curves.

Market introduction: During this phase, a new product (good or service) is brought into the
marketplace with heavy marketing spending. Promotion techniques used include advertising, samples,
coupons, etc. Strategically, prices might start low (penetration), but they often start high (skimming) in
order to recoup development costs. The firm uses limited distribution, and sales are also low.

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Market growth: This phase is characterized by accelerated sales, rise in profits, stronger
customer awareness, greater distribution channel coverage, and entry of competitors. The firm
might be able to begin increasing prices. Advertising is intended to persuade customers as to the
brand’s superiority compared to competitors.

Market maturity: During this phase, the advertising continues to persuade customers about the
brand’s relative advantages and serves as a reminder to buy the product; products may proliferate
to a fuller product line to satisfy more segments of customers; there is more competition; sales
grow but profits decline; strong competitors gain market share and weaker firms begin to fall out
of the marketplace; and the product offerings of different firms often begin to homogenize.
Instead of reducing prices, the firms should try to find new benefits and either increase, or at
least maintain, current prices.

Market decline: This phase is characterized by declining sales and profit. New products start
replacing older ones. The firm may divest, harvest, or rejuvenate the old product.

The lengths of product life cycles vary a lot. The length of product-category life cycles tends to
be longer than those of individual brands.

Figure 3. Diffusion of Innovation

In addition to the marketing actions underlying the product life cycle, marketers have also
developed a theory about what customers are doing during these phases as well.

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Marketers are of the opinion that when a new product is introduced the person to try it first goes
and shows it to others; the others appreciate it, buy it, and then tell others. This word-of-mouth or
“viral marketing” helps activate the process of the diffusion of innovations.

Figure 3 shows the diffusion process as a normal curve and partitions the customer base into five
groups.

1. Innovators: the first ~2–5% who like to try new ideas and are willing to take risks.
2. Early Adopters: the next group (~10–15%) who are even more influential as opinion

leaders, primarily because they are a bigger group.
3. Early majority: (~34%) are more risk averse than the first two groups.
4. Late majority: (~34%) are even more cautious, often older and more conservative, and wish

to buy only proven products.
5. Laggards or non-adopters (~5–16%), are the most risk averse, skeptical of new products,

and stereotypically lower in income.

Figure 4: Cumulative Diffusion

The curve of new adopters at each point in time can be recast to show cumulative sales as the
S-curve shown in figure 4. The point at which the sales rate increases rapidly is determined via
calculus as the point of inflection in the curve. This point is also known as the “tipping point.”
Marketers forecast sales using this logic.

Figure 5: Mathematical Model of Diffusion

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In the equation given in the figure, nt = [p + q(Nt – 1/M)](M – Nt – 1), we are trying to forecast nt,
i.e., the number of units we will sell during time period, t. Nt – 1 represents the number of units we
have sold so far (cumulative sales in units). M is the max on the likely market potential. The term
on the right, (M – Nt – 1), means how are we doing so far: what is the difference between what we
could sell (M) and what we have sold so far (Nt – 1). p is called the coefficient of innovation—it’s
the likelihood that someone will buy or adopt the new product due to information obtained from
the marketer. q is the coefficient of imitation—the likelihood that someone will buy or adopt the
new product due to word-of-mouth information obtained from another consumer.

There are two different ways the diffusion model has been used. First, we can observe early sales
data, fit the model, and make predictions about the future. Alternatively, we can use past results
on products similar to ours and plug in those numbers to make predictions about the future even
before launching the product.

The imitation effect (q) is usually bigger (p:q is about 1:10). The percentage of innovators and
early adopters (the customers who are driving p) is about 10–15% of the market, whereas the
remainder of the market (the majority, etc.) is 85–90%, and they are driving q. Marketers can
speed up innovators (make p bigger) by introducing price decreases early, or speed up imitators
(make q bigger) by introducing price decreases later.

Marketers interact with customers throughout these phases. During new product launch, they
heighten awareness through advertising. In the diffusion process, word-of-mouth increases the
size of q, the imitation effect.