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.
How a Life Cycle Works
It is important for investors 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:
- The product development phase includes market analysis, product design, conception, and testing.
- The market introduction phase includes the initial release of the product, usually marked with high levels of advertising.
- In the growth phase, 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.
- In the maturity phase, the product will reach the upper bounds of its demand cycle, and further spending on advertising will have little to no effect on increasing demand.
- 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.
Growth can still happen when a product hit maturity. A more mature firm with mature 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
Beyond product life cycles, finance and economics are full of other types of 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 life cycle when the biological context is clear) is a series of changes in form that an organism undergoes, returning to the starting state. Extended to a business setting, the formation and eventual decline of an entity follows a similar path to biological applications. 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."
- A life cycle in business follows a product from creation to maturity and decline.
- There are five steps in a life cycle—product development, market introduction, growth, maturity, and decline/stability.
- Other types of cycles in business that follow a life cycle type trajectory include business, economic, and inventory cycles.