As any new product begins its life cycle, it begins as a new entrant, gains popularity and enters its growth phase, passes through cyclicality, is then followed by its maturity phase and eventually the phase of saturation. Although they are different phases in the market, they share many features and characteristics in determining the market value; competition of firms within the product market, sales volume, the demand curve, marketing strategies, cost-reduction methods and the effects on the cost recovery of the firms within them.
When a product first enters the market it needs to gain a demand. Before it is popularized, there will be a slow sales volume. In figure 1 we can see that video recorders spend the first two years making very little sales, selling only 46,000 units. This also means that the product market cost recovery is low, or may even be negative, because costs are high and sales revenue is not high enough in volume. Perhaps an advantage to the first entrants is the limited competition, as the product market is not attracting new entrants, the less competition the easier it is because the few sales that are made are split between the few firms that exist. Many may think that because there are only a few firms, the market power lies in their hands, that however, is not usually the case. There are only a few oligarchies and in most situations, a new product market will be one of a competitive nature. A firm entering a new product market will be a price taker, accepting a product price rather than setting it themselves. Hence, firms cannot control prices to cover their expenses.
Soon the product begins to attract a demand as marketing strategies start influencing consumer behavior; the product has reached its growth stage. Demand increases rapidly which increases the sales volume dramatically. Looking at figure 1 we see that video recorders jumped from 96,000 units sold to 4.160 million the next year. TV sets on the other hand, increase much slower, but at a higher volume. This may be attributed to consumer behavior, where TV may be seen as a necessity in every household and video recorders as an additional unnecessary item. Nevertheless sales in all cases are increasing and this causes great reduction in costs . The growth of output combined with the high product cost recovery trajectory allows for the increase of profitability as firms become more cash generative. This enables future investments and expansion as public awareness increases even more, this attracts more consumers. The rapid growth also attracts new entrants to the product market, which as a result increases competition. Unlike the beginning of a product markets life and its maturity phase, during the growth stage competition is not a major threat, mainly because demand for the product is growing rapidly enough for every firm to benefit. However, the increase of competition and new entrants into the product market lead to price decreases.
After a relatively short period of growth and expansions, the product market reaches its mature phase. The demand for the product reaches its peak, the market is saturated. In figure 1 it can be seen that both TV sales and video recording sales reach their point of saturation, this is indicated when the sales stop increasing, and at some points decrease. This greatly deteriorates the value of the market. This is illustrated in figure 2. In mature markets, unlike the previous phases, aggressive competition and strong price cuts undermine cost recovery as volume in sales also decreases. A firm may attempt to increase cost recovery by a number of ways. It may decide to increase exports, opening a new product market where sales volume may once again begin to increase. It may also take part in segmentation, introduce a variety or in the case of strong competition, begin to differentiate its product. A firm may also try and increase its sales in the current product market by attempting to alter or reduce the replacement rate, meaning when and how consumers will replace the basic products they have with new ones. Figure three illustrates this point. The Market price range for all three household goods (TVs, VCRs, and computers) decline between 30 to 70 percent. This reflects on the market volume percentage change, all three products increase dramatically. It should be noted that the market value has declined for both the TV and VCR but increased for computers. This may be explained by unit cost or the break-even point. However, the main point presented is that when markets reach a stage of saturation, they cease to become as profitable and have difficulty sustaining their competitiveness.
The beginning of a products market life is difficult to start up. The maturity phase of a product markets life is very much the similar to that of its start. The low cost recovery and almost nonexistent profitability do not attract new entrants, they both are in need of an increasing demand and both lack competition which plays in their favour. A difference however is, at the start of a product markets life, the market and its firms want to attract new consumers and a new demand curve, while in the mature phase, the market seeks consumers to replace their already purchased products. The start of a product markets life and its maturity phase are about survival, the growth phase is about thriving. The growth phase may be short, but it has high profitability, high strong recovery, and a high demand curve. Competition is unimportant as everybody profits. How a company allocates its resources during the growth phase may reflect on its continuation throughout the maturity phase. If a company utilizes its resources efficiently, it will probably survive the phase of maturity and eventually saturation where companies are pushed out.
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