What is the Product Life Cycle?
There are many different models to be found that describe the product life cycle, some consistent of four, and others of five or six stages, and obviously the real world is much more complex. For this post, I will keep it pretty simple and basic.
Product Life Cycle Stages:
1. Introduction
2. Growth
3. Maturity
4. Decline
Effect on Prices
Introduction
During the introduction stage of a product, the price is usually highest. This strategy has the goal of recovering development costs as quickly as possible to start earning profit. For popular products, such as cellular phones, the target market's demand is reliably inelastic, which allows these higher prices charged during the introduction stage. Many consumers strive to have the newest technology at all times and are willing to pay a high price to possess it.
Growth
During the growth stage, competition has entered the market increasing the available amount of a certain product and thus increasing supply. With increasing competition, prices are set to a lower stage to be competitive in the market. In addition, companies have recovered development costs for successful products and so can start charging lower prices and still earn a high profit.
Maturity
The maturity stage of a product usually eliminates companies that charge the highest price for the given product and then further increases low-price competition and causes downward pressure on prices. Between companies, prices usually stabilize and most companies offer a similar price. During the maternity stage, prices between competitors usually decrease at a similar rate. Occasional increases in the price of a product (during the maternity stage) represent increase in costs of inputs, etc.
Decline
During the decline stage of a product, prices decrease, because the companies that are left in the market try to reach as many customers as possible. Some products survive to be so-called specialty products and if offered by one company in a geographical area, this company has pricing power and can so highly increase prices again.
Example
Every several months, Blackberry brings a new cellular phone model into the market. In its introduction stage, the demand is high for the new technology and then, these models are priced at high rates. When competition increases when other providers bring phones with similar capabilities into the market, prices decrease. After several months, when another new Blackberry model enters the market, the "older" model enters the maturity stage and later the decline stage and prices decrease for this model.