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."

RELATED TERMS
  1. Market Cycles

    Market cycles include four phases of market growth and decline, ...
  2. Stock Cycle

    A stock cycle is the evolution of a stock's price from an early ...
  3. Consolidation Phase

    Consolidation phase is a stage in the industry life cycle where ...
  4. Accounting Cycle

    An accounting cycle is the process of identifying, analyzing, ...
  5. Cyclical Industry

    A cyclical industry is sensitive to the business cycle, meaning ...
  6. Cycle Billing

    Cycle billing is the practice of invoicing different customers ...
Related Articles
  1. Trading

    Market Cycles: The Key to Maximum Returns

    Understand the various phases of the market cycle, to avoid bubbles and make the best investments.
  2. Investing

    The 4 Stages of the Investor Emotion Cycle

    Investors have an emotional counterpart to each of the four stages of the market cycle.
  3. Investing

    Company Survival: Cash Conversion Cycle Is Key

    Find out how to use this figure to analyze a firm's financial condition.
  4. Investing

    Sector rotation: Knowing the essentials

    Learn how the market signals impending economic cycles and sector performance during each stage. Find out how investors can use sector rotation for profit.
  5. Investing

    Earnings Cyclicality Exposes Profitable Trends

    Learn to explore a company's past profits to find today's opportunities.
  6. Insights

    How Will Rate Hikes Impact The Banking Sector?

    Banks traditionally rally in a rising rate environment but it may be different this time around.
  7. Personal Finance

    Save for College and Retirement at the Same Time

    Saving for college and retirement are linked and should not be approached separately.
  8. Trading

    Will a Rate Hike Appreciate The Dollar Even More? (USD, DXY)

    Many market participants expect the US Dollar to rise after the start of the next rate hike cycle.
RELATED FAQS
  1. What are the most important steps in the accounting cycle?

    Understand the steps in the accounting cycle. Learn about each of the eight steps in the accounting cycle and why each one ... Read Answer >>
  2. What's the difference between cyclical unemployment and seasonal unemployment?

    Learn about the key differences between cyclical and seasonal unemployment. Read about distinguishing features of each of ... Read Answer >>
Trading Center