STRATEGIC COST MANAGEMENT

PRODUCT LIFE CYCLE COST

Presented By:
Afrin Pathan
Tokir Patel
Shatmeen Raoter

Presented to:
Prof. Faisal Memon

Product Life Cycle

Shows the stages that products go through from development
to withdrawal from the market.
Each product may have a different life cycle
PLC determines revenue earned
Contributes to strategic marketing planning
May help the firm to identify when a product needs support,
redesign, reinvigorating, withdrawal, etc.
May help in new product development planning
May help in forecasting and managing cash flow

The Stages of the

Product Life
Cycle:
Development
Introduction/Launch
Growth
Maturity
Saturation
Decline
Withdrawal

The Development
Stage:
Initial Ideas possibly large number

May come from any of the following

Market research identifies gaps in the market
Monitoring competitors
Planned research and development (R&D)
Luck or intuition stumble across ideas?
Creative thinking inventions, hunches?
Futures thinking what will people be
using/wanting/needing 5,10,20 years hence?

Introduction/
Launch:
Advertising and promotion campaigns
Target campaign at specific audience?
Monitor initial sales
Maximise publicity
High cost/low sales
Length of time type of product

Introductory Phase
Sales
Sales

Low
Low sales
sales

Costs
Costs

High
High cost
cost per
per customer
customer

Profits
Profits

Negative
Negative

Product
Product

Create
Create product
product awareness
awareness
and
and trial
trial
Offer
Offer aa basic
basic product
product

Price
Price

Use
Use cost-plus
cost-plus

Distribution
Distribution

Build
Build selective
selective distribution
distribution

Advertising
Advertising

Build
Build product
product awareness
awareness among
among
early
early adopters
adopters and
and dealers
dealers

Marketing
MarketingObjectives
Objectives

Growth:
Increased consumer awareness
Sales rise
Revenues increase
Costs - fixed costs/variable costs, profits may
be made
Monitor market competitors reaction?

Growth Phase
Sales
Sales

Rapidly
Rapidly rising
rising sales
sales

Costs
Costs

Average
Average cost
cost per
per customer
customer

Profits
Profits

Rising
Rising profits
profits

Marketing
Marketing Objectives
Objectives

Maximize
Maximize market
market share
share

Product
Product

Offer
Offer product
product extensions,
extensions, service,
service,
warranty
warranty
Price
Price to
to penetrate
penetrate market
market

Price
Price
Distribution
Distribution
Advertising
Advertising

Build
Build intensive
intensive distribution
distribution
Build
Build awareness
awareness and
and interest
interest in
in
the
the mass
mass market
market

Maturity:
Sales reach peak
Cost of supporting the product declines
Ratio of revenue to cost high
Sales growth likely to be low
Market share may be high
Competition likely to be greater
Price elasticity of demand?
Monitor market changes/amendments/new strategies?

Maturity Phase
Sales
Sales

Peak
Peak sales
sales

Costs
Costs

Low
Low cost
cost per
per customer
customer

Profits
Profits

High
High profits
profits

Marketing
MarketingObjectives
Objectives

Maximize
Maximize profit
profit while
while defending
defending
market
market share
share

Product
Product

Diversify
Diversify brand
brand and
and models
models

Price
Price

Price
Price to
to match
match or
or best
best competitors
competitors

Distribution
Distribution
Advertising
Advertising

Build
Build more
more intensive
intensive distribution
distribution

Stress
Stress brand
brand differences
differences and
and
benefits
benefits

Saturation:
New entrants likely to mean market is flooded
Necessity to develop new strategies becomes more
pressing:
Searching out new markets:
Linking to changing fashions
Seeking new or exploiting market segments
Linking to joint ventures media/music, etc.
Developing new uses
Focus on adapting the product
Re-packaging or format
Improving the standard or quality
Developing the product range

Product Life Cycles

Sales

Effects of Extension
Strategies

Time

Decline Phase
Sales
Sales

Declining
Declining sales
sales

Costs
Costs

Low
Low cost
cost per
per customer
customer

Profits
Profits

Declining
Declining profits
profits

Marketing
Marketing Objectives
Objectives

Product
Product

Reduce
Reduce expenditure
expenditure and
and milk
milk the
the
brand
brand
Phase
Phase out
out weak
weak items
items

Price
Price

Cut
Cut price
price

Distribution
Distribution
Advertising
Advertising

Go
Go selective:
selective: phase
phase out
out
unprofitable
unprofitable outlets
outlets
Reduce
Reduce to
to level
level needed
needed to
to retain
retain
hard-core
hard-core loyal
loyal customers
customers

Decline and Withdrawal:

Product outlives/outgrows its usefulness/value
Fashions change
Technology changes
Sales decline
Cost of supporting starts to rise too far
Decision to withdraw may be dependent on availability of
new products and whether fashions/trends will come
around again?

What is Life Cycle

Costing ?

What is Life
Cycle Costing?

Accumulated
cost
Over product
life

Research and
development
To Removal

Definition
The term Life Cycle Cost has been defined as follows, it
includes the costs associated with acquiring, using, caring
for and disposing of physical asset including the
feasibility studies, research, design, development,
production, maintenance, replacement and disposal as well
as support, training and operating costs generated by the
acquisition use, maintenance and replacement of
permanent physical assets.
Today's manufacturing environment should provide
flexibility, reduction of product cycle time, and reduction
of time to market.

Phases of Life Cycle

Development

Introduction

Growth

Maturity

Decline

Key Concept

Dont look at the

accounting periods Look at the product
life cycle

Life Cycle Costing

Research &
Development

Design Production Marketing Distribution After Sales

Service

PRODUCT
PLANNING &
DESIGN STAGE

MANUFACTURING
&
SALES STAGE

SERVICE
&
ABANDONMENT
STAGE

Stages of PLC

Planning and design stage

Research and development cost, costs of
product design, etc

Manufacturing stage
Witnesses both growth and maturity in sales. All the manufacturing,
marketing, selling and distribution costs are incurred at this stage

Service and abandonment stage

This stage signified by a decline in a sales volume
The demand for the product declines at this stage. The producers may be
required to provide after sales service for the already sold products
Costs that are incurred in this stage include all costs relating to after sales
service including provision of spares and expert services and costs of
abandonment and disposal of the product

Illustration 1
Total
R&D

300

300

Design

200

200

Product Costs

75

90

90

255

Marketing Costs

70

50

30

150

Distribution Costs

20

27

24

71

Customer Service Costs

15

23

30

68

Graph
Sales and
Profits ($)
Sales
Profits
Time
Product Introduction
Developme
nt
Losses/
Investments ($)

Growth

Maturity

Decline

Development
Cost Incurred

Research and development

Testing
Capital
Training

No Revenue
Loss Making
Large % total Cost
Trying to minimize

Introduction
Introduction
Introduction to market

Unknown

Marketing
Required

Cost incurred

Advertising /
Marketing

Training

Production /
Distribution

Growth

Growth
Revenues
Build

Move into
Profit

Economie
s of scale

Costs

Inventory
Holding

Productio
n/
Distributio
n

Maturity

Demand Slows

Maturity

Adapt / improve Product

Reduce Marketing

Decline
Low demand
Market looses Interest
Long Phase

Illustration II
Year

Development

R&D

Growth

Maturity

Decline

50

40

20

200

Marketing Cost
($ million )

Production Costs

Total

Intro

$4 x 2m = $3.50 x 5m $3 x 10m
$8m
=$17.5m
=$30m
200

58

57.5

50

Total life-Cycle Cost ($m)

( 200+58+57.5+50+16.8)

Total Production (m)

(2+5+10+4 )

Cost Per Unit

(382.3/21)

$3.20 x 4m
= $12.8m
16.8
382.3
21
$18.20

Implications
Pricing

Performance

Traditional

Upto 90 % costs
in R&D

Life Cycle

Track Costs
through life cycle
Focus on early
decisions
Minimize time to
market

1. Traditional

Traditional

Write off R&D

In period incurred

New R&D against old products

Make old look less profitable

2. Life Cycle

Allocate Costs to products

Priced to cover life costs

Advantages
Efficient resource
allocation

Advantages

Track Cost to
products
R&D
ID Relationship
between
Ultimate Cost

Thank You..