Life Cycle

What Is a Life Cycle?

A life cycle is a course of events that brings a new product into existence and follows its growth into a mature product and eventual critical mass and decline. The most common steps in the life cycle of a product include product development, market introduction, growth, maturity, and decline/stability.

Understanding the Life Cycle

Investors need to understand a company's product life cycle. Firms that are predominately in the development phase will likely be characterized by small levels of sales and are more speculative in nature than firms in the growth or maturity phase. The five stages of a typical life cycle are:

Product Development Phase

This phase includes market analysis, product design, conception, and testing of a product or service. Funds from the initial start-up are typically used for this phase, and if revenue is low and development costs are high, it can be a period of low cash flow for the company.

Market Introduction Phase

This marketing phase includes the initial release of the product, usually marked with high levels of advertising. At this stage, the company may be spending its capital in the hope of generating revenue in its next phase. The money for this phase usually comes from early investors, company owners, or suppliers.

Growth Phase

This phase is when sales growth begins to accelerate, characterized by increasing sales year-over-year. As production levels increase, gross margins should steadily decline, making the product less profitable on a per-unit basis. An increase in competition is probable, and cash flow may be coming from profits, bank loans, and partnerships.

Maturity Phase

In this stage of growth, a product will reach the upper bounds of its demand cycle. Further spending on advertising will have little to no effect on increasing demand, and the financial stream may come from higher profits.

Decline/Stability Phase

The decline/stability phase arrives when a product has reached or passed its point of highest demand. At this point, demand will either remain steady or slowly decline as a newer product makes it obsolete.

In addition, profits may dip, or an owner may consider selling the business. Growth can still happen when a product hits maturity, but a more mature firm with older products may be more likely to issue dividends than firms in the other phases.

Hitting the maturity stage doesn’t mean growth stops, as margin improvements and innovations can boost income.

Types of Life Cycles

An industry life cycle has four stages: expansion, peak, contraction, and trough. An analysis of a business or company can show the stage a company is in. By analyzing the four stages of a company's industry life cycle, financial decisions, like estimating forward earning ratios and project future financial earnings and performance, can be made with greater knowledge.

Beyond product life cycles, finance and economics are full of other life cycles, which can often mean a series of overlapping themes. But most "cycles" are marked by their rise and fall patterns. For instance, it is common to hear of a business cycle, economic cycle, or even an inventory cycle at a more micro level.

The idea of a cycle in a business context is borrowed from biology. In biology, a biological life cycle (or just a life cycle when the biological context is clear) is a series of changes in the form that an organism undergoes, returning to the starting state. Extended to a business setting, an entity's formation and eventual decline follow a similar path to biological applications.

Examples of Life Cycles

Tab Soda

Coca-Cola released this diet soda in 1963, decades before Diet Coke's heyday. Tab was the company's first foray into the diet drink market. The drink became popular in the '70s and early '80s but fizzled out in popularity when Diet Coke created a decline in the Tab's market share. Coca-Cola discontinued Tab in 2020, along with other products that were underperforming. This discontinuation marked the decline life cycle phase for the once-popular diet beverage.

Electric Cars

Electric cars are in their growth cycle as of April 2021. The global Electric Vehicles Market was worth approximately $140 billion in 2019, the most recent figures made available by Facts & Factors, which published a 175-page research report on the electric vehicle market. The electric car is a prime example of a product in the "growth" phase of a life cycle. It is estimated that by 2026, the electric car market will hit $700 billion. And it's not just Tesla running the electric car charge anymore. Top market players also include Kia, Hyundai, BMW, Volkswagon, Ford, and Toyota.

If we think of the economy and commerce as a "living organization," adapting and transforming to its surroundings, we can find many biological analogies for business challenges, such as "survival of the fittest."

Life Cycle FAQs

How Does the Business Life Cycle Affect a Company's Business Strategy?

By examing the life cycle of a product or service, a company can take different actions depending on the cycle the product or service is in.

In What Stage of the Business Life Cycle Does Seed Financing Occur?

Seed financing usually happens in the product development stage.

What Impact Does the Life Cycle Have on a Small Business?

If a small business makes a product that goes into decline, the business could fail.

What Part of the Business Life Cycle is Facebook In?

Facebook may be in the maturity phase heading into decline or stability, according to various sources, including GWS Technologies.

The Bottom Line

In business, a life cycle is a way to describe the birth, growth and maturation, and eventual decline of a product or service. By seeking to understand the sequence of events in a life cycle, companies can make better financial decisions. These steps include product development, market introduction, growth, maturity, and decline/stability, and in many ways mirror the biological life cycle of a living organism.

Managing the lifecycle of a product is helpful in many ways for a company, from getting a better understanding of how to improve on a new product, increase marketing and sales, and reduce errors or waste, like the packaging.