Reviewed by Aug 27, 2020| Updated on
What is a Life Cycle?
A life cycle is a series of events that gives birth to a new product and follows its development into a mature product and ultimately becomes a critical mass and decay. Product development, market launch, rise, maturity, and decline/stability are the most common steps in a product's life cycle.
Understanding the Life Cycle
It is critical for investors to understand the product life cycle of an enterprise. Companies that are primarily in the development process are likely to be characterised by low revenue rates and are more volatile in nature than businesses in the growth or maturity process.
The phase of product development comprises market research, concept manufacturing, product design, and testing.
The process of market launch involves the initial release of the drug, typically marked with high advertisement levels.
Sales growth starts to increase in the development process, marked by year-over-year revenue gains. When production rates rise, the gross margins will decrease slowly, making the product less competitive per unit. It is likely to see a surge in demand.
The product will hit the upper limits of its demand cycle in the maturity process, and more promotional investment will have little or no impact on rising demand.
The period of decline/stabilisation occurs after a commodity has hit or exceeded its peak demand level. From this point, when a newer product renders it redundant, demand will either remain steady or gradually decline.
When a product reaches maturity, growth can still occur. In other stages, a more mature business with mature goods may be more likely to issue dividends than firms.
Types of Life Cycles
Finance and economics are full of many forms of time cycles besides product life cycles, which can also imply a number of overlapping themes. Yet most "cycles" are characterised by their patterns of rising and fall. It is normal, for example, to learn about a market cycle, economic cycle, or even a more micro-level inventory cycle.
In a market sense, the notion of a process is borrowed from biology. In biology, a biological life cycle (or simply life cycle when the biological meaning is clear) is a sequence of changes in the process 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 organisation," adapting and transforming to its surroundings, we can find many biological analogies for business challenges, such as "survival of the fittest."