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Article Excerpt
Research on the product life cycle (PLC) has focused primarily on the role of diffusion. This study takes a broader theoretical perspective on the PLC by incorporating informational cascades and developing and testing many new hypotheses based on this theory. On average, across 30 product categories, the authors find that: (i) New consumer durables have a typical pattern of rapid growth of 45% per year over 8 years. (ii) This period of growth is followed by a slowdown when sales decline by 15% and stay below those of the previous peak for 5 years. (iii) Slowdown occurs at 34% population penetration and about 50% of ultimate market penetration. (iv) Products with large sales increases at takeoff tend to have larger sales declines at slowdown. (v) Leisure-enhancing products tend to have higher growth rates and shorter growth stages than nonleisure-enhancing products. Time-saving products tend to have lower growth rates and longer growth stages than nontime-saving products. (vi) Lower probability of slowdown is associated with steeper price reductions, lower penetration, and higher economic growth. (vii) A hazard model can provide reasonable predictions of the slowdown as early as the takeoff.
The authors discuss the implications of these findings.
Key words: product life cycles; sales takeoff; cascades; new product growth; innovation; product management; diffusion; high-tech marketing
History: This paper was received December 21, 2001, and was with the authors 15 months for 3 revisions; processed by Pradeep Chintagunta.
1. Introduction
The product life cycle (PLC) is a vitally important phenomenon in marketing for at least three reasons. First, pressure on managers varies dramatically before and after the turning points in the life cycle. During the introduction (prior to takeoff) pessimism abounds and managers are under increasing pressure to pull the plug on new products. During the growth stage (prior to slowdown) optimism abounds and managers are eager to meet the apparently insatiable demand with fresh capacity and expanded marketing. Predicting the turning points of takeoff and slowdown are essential to avoid premature withdrawal or excessive investments. Second, the level and growth of sales vary dramatically across stages of the life cycle. Managers need to know these changes to appropriately plan the corresponding levels of production, inventory, sales staff, distribution, marketing, and advertising. Third, costs and prices decline substantially over the life cycle, especially during the early stages. In contrast, consumers' sensitivity to price increases over the stages of the life cycle. Managers must understand the sales patterns and change their strategy accordingly. Because of its critical impact on marketing strategy, the PLC has become a central, enduring framework in marketing. Its intuitive appeal has spread to other disciplines where the concept is used routinely.
In marketing, two streams of literature address the PLC. One stream of rigorous research initiated by Bass (1969) has attempted to model the pattern of sales during the growth stage relying on a social theory of adoption and imitation (e.g., Bass et al. 1994; Gatignon et al. 1989; Horsky and Simon 1983; Mahajan et al. 1990, 2000; Putsis et al. 1997; Talukdar et al. 2002; Van den Bulte 2000). A second stream of exploratory research has sought to ascertain the generalizability of the PLC across different industries (e.g., Polli and Cook 1969, Tellis and Crawford 1981). While this research stream has identified some patterns of the PLC (e.g., Tellis and Fornell 1988), it has neither explored all the theories for these patterns nor described the characteristics of the marketing mix over the PLC (Day 1981, Rink and Swan 1979).
A review of these streams of research suggests the following areas that can benefit from further research. First, the PLC lacks clear metrics for the turning points that define the various stages. In the absence of such metrics, the concept lacks predictive validity and empirical meaning. In particular, managers need such metrics to determine whether they should persevere or quit, build or hold. Second, the PLC lacks a comprehensive description of economic and market variables during its various stages. Such a description would help to further identify the stage in which a product may fall and the strategy managers should adopt. Third, PLC research has not considered the potential impact of informational cascades on new product sales.
Our study seeks to address these limitations. It contributes to the literature in four ways:
* We define specific metrics for the two key turning points in the PLC, takeoff and slowdown.
* We broaden the theory of the PLC by incorporating informational cascades.
* We develop a hazard model for the duration of the growth stage. The model can be used to predict slowdown, as early as takeoff.
* We test hypotheses and present new statistics about the PLC. These results suggest emerging regularities about the PLC.
The rest of this paper is organized as follows. Section 2 presents our definitions and development of hypotheses. Sections 3 and 4 propose a model of the growth stage followed by a discussion of our data and operational measures. Section 5 presents our results, and [section]6 concludes with a discussion of the key findings, their implications, and directions for future research.
2. Broadening the Theory of the Product Life Cycle
We begin this section by defining the key events and stages of the PLC. Then, we describe the theory of informational cascades (Bikhchandani et al. 1992, 1998) and derive nine hypotheses based on this theory. We also derive two additional hypotheses based on diffusion theory (Rogers 1995).
Definitions
We define a product category as a group of products that are close substitutes and fulfill a distinct need from the consumer's viewpoint (e.g., refrigerators, CD players, and camcorders). Our analysis of product categories is the same as nearly all previous research on the sales growth of consumer durables (e.g., Bass 1969, Sultan et al. 1990).
We define the four stages of a PLC as follows:
1. Introduction is the period from a new product's commercialization until takeoff.
2. Growth is the period from a new product's takeoff until its slowdown in sales.
3. Maturity is the period from a product's slowdown until sales begin a steady decline.
4. Decline is the period of steadily decreasing sales until a product's demise.
These stages occur due to well-defined events in the history of a new product. We define three of these events, which mark the beginning and end of the first two stages.
1. Commercialization is the point at which a new product category is first sold to consumers.
2. Takeoff is the point of transition from the introduction to the growth stage of the PLC. It is the first dramatic and sustained increase in product category sales.
3. Slowdown is the point of transition from the growth stage to the maturity stage of the PLC. The slowdown signals the beginning of a period of level, slowly increasing, or temporarily decreasing product category sales. A later section proposes a specific operational measure for the slowdown.
Informational Cascades
Informational cascades describe how people converge on adopting a behavior with increasing momentum and declining individual evaluation of the merits of the behavior, due to their tendency to derive information from the behavior of prior adopters (Bikhchandani et al. 1992, 1998). The essence of informational cascades is that even though individuals make decisions based on their own private information, their decisions are influenced by other people's decisions, too.
As people adopt a new product based on its merits, their adoption provides a signal to nonadopters. Some of these nonadopters go on to adopt the new product, at least partly influenced by the behavior of the previous adopters. As the number of adopters increases, they provide an increasingly strong signal to the nonadopters, who then adopt in increasing numbers. Once information derived from the decisions of others begins to outweigh an individual's private valuation, the process...
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