What happens to the cash flow of a business at the growth stage of the product life cycle

See also:
Product Life Cycle
Company Life Cycle
Why You Need a New Pricing Strategy
Increasing Pricing on Products

What is the Product Life Cycle?

A product life cycle includes stages the product experiences throughout its lifetime – from conception of the idea to the decline and abandonment of the product. Some products experience longer life cycles than others; however, all products go through the product life cycle stages.

Product Life Cycle Stages

What are the product life cycle stages? They are introduction, growth, maturity, and decline. Some may add other stages in between the four listed, including research and development, abandonment, and revitalization.

Introduction

The introduction stage is often preceded by a research and development stage. For the purposes of the product life cycle stages, we will start from when the product is first introduced to the marketplace. This stage is by far the most expensive stage in a product’s life cycle. Sales are typically slow, so a company may be bleeding cash until the product hits the next stage.
Pricing and promotion are critical in this stage of a product’s life. If it is not priced profitably or promoted effectively, then the product will arrive at the decline stage much quicker than anticipated.


If you want to see if you have a pricing problem and learn how to fix it, then click the button to access our Pricing for Profit Inspection Guide.

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Growth

The next stage is the growth stage, where the company ramps up its sales and profits. The company will now be able to take advantage of economies of scale, profit margins, and increased profitability. Companies typically reinvest in this stage to grow the potential.
As the product gains more market share, increases distribution, etc., it will be ever important to scale the manufacturing and distribution effectively. A company needs to have an effective supply chain and logistics process to grow supply to the increasing demand. The worst thing that a company can experience in the growth stage is not being able to keep up with demand. Remember, growth impacts a company’s cash flow.

Maturity

In the maturity stage of the product life cycle, a company will start broadening the product’s audience, use, and availability. It is now able to maintain a consistent market share. A company will also continue to increase its production and logistics as demand continues to grow. The product becomes more popular during this stage. As a result, a company needs to be more careful in what marketing.
For example, when the iPhone was first released, many early-adopters acquired that technology. It took a few more years for it to become one of the most popular smart phone brands. As the product matures and continues to gain popularity, Apple continues to release newer, better, and greater models for a higher price.

Decline

Demand will eventually decline for a variety of reasons. Some of those reasons may include that there is a better product on the market or there is no need for that product anymore. This decline stage ends in total abandonment. A company usually has three options during this decline stage. Those include:

  1. Offer the product at a reduced price
  2. Add new feature or revamp the product
  3. Allow it to continue to decline, resulting in the elimination or abandonment of the product

If the company decides to take option 3, then the entire product line is discontinued. Furthermore, they will liquidate any remaining inventory for that product.

What Stage Your Product Is In

So, what stage is your product in? As a financial leader, it is important to know what stage your product is in because it impacts profitability and the company’s value. If you are in one of the first 3 stages, then it’s time to check your pricing for your products. Are you pricing them to result in profit every single time? If you are not sure, then download the free Pricing for Profit Inspection Guide to learn how to price profitably.

What happens to the cash flow of a business at the growth stage of the product life cycle

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What happens to the cash flow of a business at the growth stage of the product life cycle

At this point in your product's life cycle, you should be putting your efforts into:

  • increasing your product's market share
  • creating a brand preference for your customers

Product growth stage

This should be a period of rapid growth in both sales and profits for your product or service. Your profits should rise through an increase in output and more competitive pricing.

You should also consider:

  • maintaining product quality and adding features or support services for the product
  • maintaining pricing to increase demand for the product
  • increasing distribution channels to cope with demand
  • aiming promotion at a wider audience

If your profits are still low, consider reducing the price of the product or service to increase the volume of sales. See how to price your product or service.

Remember that different marketing strategies work better at different stages of the product's life cycle. You may want to tailor your strategies to your product's changing marketing position. Read more about product life cycle strategies.

Product maturity stage

If your product or service makes it to the maturity stage, this should be the longest part of its product life cycle.

At this stage, you will probably notice that:

  • you may need to enhance product features to make it more appealing than competitors'
  • you may need to lower your pricing due to increased competition
  • distribution is becoming more intensive and you may need to offer incentives
  • you may need to focus your promotion on the difference between existing products

At this point, the market has often reached saturation as a result of competitors releasing their own version of your product. Your product or service may experience a decreasing rate of sales, which should eventually stabilise.

To prolong their life span, you should aim to differentiate your product or service from others that your competitors offer. You can do this by focusing on and highlighting any branding, trademarks, or customer testimonials that may give you an advantage.

Keep in mind that the sales of most products will decline at some stage and the product will come to its natural end. Find out more about this in product life cycles - decline stage.

What happens to cash flow at each stage of the product life cycle?

The cash flow from a product as it moves through its life cycle will change. Initially high development costs and high promotional costs will mean a negative cash flow, but as the products moves through the growth phase and into maturity, the cash flow should start to become positive.

What happens in the growth stage of product life cycle?

Growth. During the growth stage, consumers have accepted the product in the market and customers are beginning to truly buy in. That means demand and profits are growing, hopefully at a steadily rapid pace. The growth stage is when the market for the product is expanding and competition begins developing.

What happens to the cash flow of a business at the growth stage of the product life cycle quizlet?

- In the growth period, eventually revenue from the product will be greater than spending and so cash flow becomes positive. This is because sales will be increasing and average costs may be falling as output increases.

How does money flow in the growth phase?

Growth phase You will need to hire more people to work for your business, which means you need to spend more on wages. Most of your money will be spent on payments to suppliers and employees before it comes back into the cash cycle in the form of payments for the sales you've made to your customers.