Every product available in the market has a life cycle, and the length of it will depend on the amount of attention being received from customers. As a product is at its peak of sales, their cost recovery will improve as profits will start to cover the money put into to producing the product. Depending on a product’s market phase, the more attention it receives from the general public will help contribute to more earnings, leading to a greater difference between revenue and costs of goods sold. Therefore, cost recovery is affected by a product’s position in their market phase.
A product new to their life-cycle is part of the growing product market as they have to establish their share of the market. During this period, there will be a rapid growth in sales as a product has recently become known to customers interested, seeing as it is something completely new. The state the product is in during the growing product market will be seen as ‘one of a kind’ and there will be very few or no competitors. The company with the newly established product will be retaining profits for the first time in this stage.
Along with earning profits, the business should be investigating and planning how to be able to produce the same product with reduced costs, as it is important in case the popularity of the product decreases so profits will still be made. In addition, any company in this stage will be seeking an increase of market share and building their brand. Below is a figure showing the product life cycle creating an idea of what position a product is in throughout each phase. (Figure: “Product Life Cycle. ” QuickMBA)
When a product has passed through the growing product market phase, it will eventually go into the mature product market. As seen in the figure, there is a decrease in a product’s popularity after maturity. The product by now should have reached its peak and customer’s interest for it is not as high. The general public should own some type of product similar to the original, causing it to not be considered a desired object. If it ever were to peak again, the company will have to persuade customers to replace their current product with a newer and more improved one.
Also, competition is high among other companies as they are selling a similar product causing a decrease in prices for all products. At this stage, many businesses are deciding whether to let their product saturate or invest more money into creating a newer version. An example of a product within the growing market share is the three dimensional television, which premiered in early 2011. Although few companies are competitors within the market share, it is still relatively new and has created much popularity among customers.
Not until now have people shown interest which market research firm iSuppli proved by releasing the statement, “Brands are marketing 3D not as a must-have technology but as a desirable feature, similar to the approach they have taken with internet connectivity. ” It may be the reason for the sudden interest in the product resulting in a boost in sales. People are realizing it is an essential product to have in their homes as it is unique. The figure showing the amount of sales goes to show that three dimensional televisions are definitely still in the growing phase. Figure: “Hugh’s News” 2010) An ideal example for a mature product is the video game, Call of Duty, as it has been featured in the market for over ten years; however, new editions are launched when interest for their game decreases. Recently, a third installment of the game was released causing a major increase in sales as the latest version is truly ‘one of a kind’. At this state, no competitors have emerged into the market yet. It has also resulted in Call of Duty being in the growth phase again; it will re-live the product life cycle.
This is a successful example of retaining more profits from a product by convincing their customers to replace their current video game for a new one. Similarities during the growth and mature stage are the increase in competition and the price of the product. Although prices would seem to be quite high throughout the growth stage, it is more reasonable to keep costs low to gain more interest from customers. It is not until the product has made a proper establishment among the market that prices can slowly increase.
Prices may be the same during the growth stage and towards the end of the mature stage, but only for two different reasons. The price chosen for the product is used to draw attention from new customers in the growth stage. However, during the mature stage the reason is based on trying to keep their current customers or to gain even more. Competition will be more of a problem throughout the mature stage, as there are only a few existing during the growth stage. It is only considered a problem for a mature product as a company should be planning how to keep their product as a demand from the public.
Financially, a company will be more profitable during the mature stage as they have retained most of their profits to cover their costs of goods sold. For a business still in their growth phase, their profits have only started to help finance their productions. During the two different stages, a product will be about same concerning popularity; however, financially a mature product will be earning more profit than a growing one. (Figure: “Health & Social Care Forum 2011) Although it is important to be examining the difference stages’ products go through with their popularity, cost recovery is influenced throughout the process.
Cost recovery itself occurs when a business earns enough profit to cover costs for all services used to produce a product. When a company achieves cost recovery, they are then aware that they can fund their products for future sales and are from then on receiving profits. However, it is only registered as a profit when it can be documented to its original sale; for example, if a product is purchased on credit by a customer, the profits will only be registered once the customer has completely paid off their credit for the product.
In the figure above, we can see several examples of costs that many businesses use when producing a product; there are many required services needed to fulfill needs for the product. All costs for the services will be paid for when cost recovery is achieved. The market affects cost recovery concerning the amount of profit a business is making. When a company goes through the growth market product stage, it is first then retained profits will be able to cover debts they have created throughout the process of their new product. Cost recovery is then becoming achievable as a company can begin to cover most costs.
Nonetheless, throughout the mature product market, cost recovery is constantly being achieved as interest in a company’s product is still quite high resulting in high retained earnings. Problems can emerge when the interest of a product slowly decreases because there is a risk that profit will not be made; it is then when cost recovery is not achievable and a product could eventually go into decline and saturate. The characteristics of the different product markets are important contributors towards profits for a company. The higher demand for a product results in more earnings a business will achieve.
The growing and mature phases have the most impact on a company as their cost recovery is finally achievable, making it easier to produce their products for future sales. A company is only financially comfortable when selling a considered growing or mature product, not when their product is declining in sales. Therefore, cost recovery will only gain positive effects in the most successful stages of a selling product.
Bibliography:
1. Griffiths, Alan, and Stuart Wall. “Pricing in Practice. ” Applied Economics: an Introductory Course. New York: Addison Wesley Longman, 1999. 180-95. Print. 2. Tarascio, Linda Scott. and Vincent J. Tarascio. “The Product Life Cycle: Analysis and Applications Issues. ” Journal of Marketing: Cumulative Index, Volumes 1-52 (1936-1987). Greenwich, CT: Published for the American Marketing Association by Jai, 1989. 60-67. Print. 3. “The Total Product Life Cycle. ” Engineering Design – A Project Has a Defined Set Stages Called the Product Life Cycle (PLC). It Is Based upon the Biological Life Cycle. Open Learn Lab Space. Web. Dec. 2011. . 4. “Product Life Cycle. ” QuickMBA: Accounting, Business Law, Economics, Entrepreneurship, Finance, Management, Marketing, Operations, Statistics, Strategy.
Web. Dec. 2011. . 5. “JAPAN: Hitachi to Hold Back on 3D TVs until next Spring. ” Whathifi. com. Web. Dec. 2011. . 6. Full Cost Recovery. Web. Dec. 2011. . 7. “3D TV Sales to Top 64 Million by 2018 « Hugh’s News. ” Hugh’s News. Web. Dec. 2011. . 8. “Call of Duty: Modern Warfare 3 Breaks Sales Records – Telegraph. ” Telegraph. co. uk – Telegraph Online, Daily Telegraph and Sunday Telegraph – Telegraph. Web. Dec. 2011. . 9. Henry, Jubal. “Full Cost Recovery Diagram. ” Health & Social Care Forum. 11 July 2011. Web. Dec. 2011. .
