Anytime a company develops a new product or service, it needs to be aware that the product and/or service will not last forever. This is important to recognize in the early stages of development so that a firm can maximize their profits during the product's life cycle. Albeit, no company can accurately predict the duration of a product or service, any product/service progresses through four distinct phases. Each phase is associated with different costs, profits and risks. Collectively, these phases are known as the Product Life Cycle (PLC) and are classified into: Introduction, Growth, Maturation, and Decline.
The introduction phase is the first phase for all new businesses, products, and services. Any new idea, new business or service cannot escape this phase. Sales are generally extremely low and slow to takeoff. Marketing costs are required to create customer awareness, interest, and introducing the product/service into various distribution channels are is quite high.
Profits tend to be negative or low because of the low volume of sales. Lastly, competitors are very few in number since the firm introducing the product/service is typically an innovator.
Businesses, products, and services in the growth stage experience a significant increase in sales. The increase in sales is due to viral marketing, an increase in the number of competitors who now have their own version of the product/service, and promotion of the product. Costs are declining on a per unit basis because the scale economies are in production. Profits rise significantly because of the increase in sales and the decrease in unit cost. However, competition increases and firms rely on product differentiation to gain competitive advantage. The MP3 player is currently in this life stage.
Sales continue to grow during the early part of maturity but at a much slower pace and eventually peak.