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 the following phases:
- Product Development Phase - Includes market analysis, product design, conception and testing.
- Market Introduction Phase - Initial release of the product, usually marked with high levels of advertising.
- 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.
- 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.
- Decline/Stability Phase - This is where 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.
BREAKING DOWN Life Cycle
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.
When a firm reaches the maturity stage, it does not mean that a product is no longer a growing income source for the company, as there may still be further margin improvements and innovations. Furthermore, a more mature firm with mature products may be more likely to issue dividends than firms in the other phases.
Other Types of Cycles in Finance
Beyond product life cycles, finance and economics are full of other 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 surrounding, we can find many biological analogies for business challenges. Such as "survival of the fittest."