The product life cycle theory was propounded by economist Raymond Vernon in 1966. With the help of this theory, he sought to explain the various stages that a product goes through after it enters the market. It explains the reasons that determine the growth, maturity, and the decline of a product, and how the stages of its life cycle determine foreign trade.
Product Life Cycle Theory
Raymond Vernon explained that from the invention of a product to its demise due to a lack of demand, a product goes through four stages: introduction, growth, maturity, and decline. The duration of these stages is not fixed, and largely depends on the demand for the product in the market, and, to some extent, the cost of production and the revenue that the product generates. If the product remains in demand for a long period of time, and the cost of production steadily declines, its life will be longer. On the other hand, if the cost of production is too high, and the demand for it is largely limited, then the product will die sooner. Hence, it is not possible to predict the duration of the cycle.
Product Life Cycle
For the sake of the theory, Vernon makes the assumption that a product is first invented and developed in the developed countries like the United States. In the introduction stage, people are unaware of the product and its utility, and hence, the demand for it is very low. The cost of production is very high, as the product is still under development, and standardized production and economies of scale cannot be achieved yet. Hence, only people from the developed countries will purchase the product, as they have the resources to buy something a bit expensive.
For example, let us assume that a new fabric has been invented in the US for making clothes. Now, people are unaware of this fabric, and are unwilling to replace the cotton and nylon that they are using. As the demand is very low, the product doesn't yet enjoy the economies of scale, and hence, the cost of production is still high.
The next stage in the analysis is the growth stage of a product. The growth stage is what will make or break the product. As the producers find a way to reduce the cost of production, they will offer the new product at low introductory prices to boost its demand. This is pretty much the make-or-break period for the product, and this stage is characterized by heavy and aggressive marketing, advertising, and promotion. If customers feel that the product is worth the money and has good enough utility, the demand will catch up with the expected demand, and the product will move into the maturity stage. If the demand does not catch up, and people dislike the product, it will quickly decline.
Continuing the above example, during the growth stage, the fabric-making company will come up with attractive designs and prices. They will invest in marketing and promoting the product, so that awareness is created in the minds of prospective customers about the qualities and advantages of using this new fabric. If the fabric catches on, it will move to the next stage, if not, it will go straight to the decline stage.
The third stage is the maturity stage. In this stage, the cost of production falls dramatically due to standardized production. This ensures mass production, and hence, the company receives the benefits of economies of scale. In the maturity stage, the production and the technology may also be exported to developing and underdeveloped countries, where the cost of production will be lower. This move will benefit both the developed and developing countries, as the developed countries can focus on innovation, while the developing countries are employed in the production activity. In the maturity stage, the product is no longer a novelty, but pretty much a widely-used necessity.
In this example, the maturity stage of the fabric will come when it becomes a mainstream fabric which is used all over the world. The producing company will, to reduce the cost of production, export (outsource) the standardized production process and technology to developing countries.
The decline stage is marked by a gradual reduction in the demand for the product, and hence, there will be a gradual reduction in the production as well as the sales. Newly created variants or alternatives will enter the mainstream, and drive the old, outdated product out of the market. The market slowly diminishes first in the developed countries, and slowly, later in the developing countries.
In this example, if a new fabric is created which masks the problems or the shortcomings of the product, the old product will slowly be phased out, and that will be the end of its life cycle.
The product life cycle theory is popular among marketers, as different stages of a product require a different marketing strategy.