Relevance and Application of the Product Life

Relevance and Application of the Product Life Cycle Concept in Budgeting

Company and business unit budgets often lend financial expression to strategy, inspire managers to attain generally understood targets and offer a logical framework for the analysis of outcomes. On the other hand, many companies suffer from badly conceived or incompetent budgeting processes which do not inspire accomplishment of targets and are of little value for operational management (Corporate Budgeting, n.d.).

Life cycle budgeting comprises approximations of a product's revenues and expenses over its complete life cycle starting with research and development, going through the introduction and growth stages, into the maturing stage, and in conclusion into the harvest or decline stage. Life cycle budgeting adopts a life cycle approach. It is planned to account for the expenses at all stages of the value chain. This knowledge is significant for pricing choices because revenues must cover expenses acquired in each stage of the value chain, not just manufacturing. Life cycle budgeting highlights the associations amid costs acquired at dissimilar value chain stages, for instance, condensed design expenses on future customer service costs (Siegel and Shim, 2006).

A product's life cycle (PLC) can be separated into a number of stages characterized by the income made by the product. The first stage is known as the introduction phase. When the product is first brought to market, sales will be low until consumers become conscious of the product and its benefits. A number of companies may announce their product prior to it is introduced, but such announcements also alert rivals and take away the element of surprise. Advertising expenses characteristically are high throughout this stage in order to quickly increase consumer consciousness of the product and to target the early adopters. Throughout the introductory stage the company is likely to acquire supplementary expenses connected with the initial delivery of the product. These higher costs joined with a low sales volume frequently make the introduction stage a stage of pessimistic profits (The Product Life Cycle, 2010).

In the introduction phase, sales are often sluggish as the corporation builds consciousness of its product amid possible consumers. Advertising is vital at this stage, so the marketing budget is frequently large. The kind of advertising depends on the product. If the product is planned to reach a large audience, than an advertising campaign built around one idea may be in order. If a product is specific, or if a business's capital are limited, than lesser advertising campaigns can be utilized that target very exact consumers. As a product matures, the advertising budget connected with it will most probably shrink since consumers are already conscious of the product (Product Life Cycle, 2011).

The second stage is the growth stage. The growth stage is a stage of rapid revenue growth. Sales swell as more consumers become conscious of the product and its benefits and supplementary market segments are targeted. Once the product has been established an achievement and consumers begin asking for it, sales will go up further as more retailers become interested in selling it. The marketing team may increase the distribution at this point. When rivals enter the market, frequently throughout the later part of the growth stage, there may be price competition or augmented promotional expenses in order to encourage customers that the firm's product is enhanced than that of the rivalry (The Product Life Cycle, 2010).

The third stage is the maturity stage. The maturity stage is the most lucrative. While sales persist to enlarge into this stage, they do so at a slower rate. Because brand awareness is strong, advertising costs will be condensed. Opposition may result in diminished market share or costs. The competing products may be extremely similar at this point, escalating the complexity of distinguishing the product. The business places exertion into encouraging competitors' consumers to switch, mounting usage per consumer, and changing non-users into consumers. Sales promotions may be presented to encourage sellers to give the product additional shelf space over rival products (The Product Life Cycle, 2010).

The last stage is the decline stage. Ultimately sales start to decline as the market becomes inundated, the product becomes technologically out of date, or consumer tastes alter. If the product has developed brand faithfulness, the productivity may be preserved longer. Unit expenses may go up with the waning production volumes and in the end no more profit can be made (The Product Life Cycle, 2010).

An example of how this process works can be seen when a business decides to launch a new product. In the introduction phase the business will need to dedicate more money to the product in order to get through the research and design phase, the actual production of the product and the early marketing of the product.