What Is a Life Cycle?

The term life cycle refers to the course of events that leads from the beginning to the end of a product, business, or industry. This means that a life cycle brings new products, companies, and industries into existence, sees them grow, and eventually leads to their critical mass and decline. There are several key steps that life cycles take, including development, growth, and decline. Understanding how the life cycle works can give investors and others a better understanding of how to invest their money.

How the Life Cycle Works

The idea of a cycle in a business context is borrowed from biology. In biology, a life cycle represents a series of changes that an organism undergoes, from birth to death. Extended to a business setting, an entity's formation and eventual decline follow a similar path to biological applications.

The life cycle represents the entire existence or life of something in the marketplace. This includes products and services, businesses and corporations, and even industries. In most cases, even the economy goes through a life cycle. We look at each of these in more detail a little further down.

Throughout each of these types of life cycles, there is a development, maturity, and decline phase. As such, the life cycle represents the length of time it takes for a product to be introduced in the market until it is eventually removed.

Special Considerations

There is a misconception that growth tends to stop when a product or business hits its peak in the market. In certain cases, profits may dip or a business owner may consider selling their company during this period. This may be the case for startups and newer businesses.

But this isn't a one-size-fits-all approach. In fact, reaching the maturity stage can often mean that growth continues, as margin improvements and innovations translate to an increase in income. Although growth can still happen when a product hits maturity, a more mature firm with older products may be more likely to issue dividends than firms in the other phases.

This is why investors need to understand the life cycle works. Doing so can help them make better and more informed decisions about how to invest their money. For instance, it's important to note that firms that are predominately in the development phase are generally characterized by lower sales and are more speculative in nature than firms in the growth or maturity phase.

Types of Life Cycles

As mentioned above, there are different types of life cycles that take place. The most common ones that are discussed are the product, business, and industry life cycles. But there are others that take place in the realms of finance and investment that people should understand.

Product Life Cycle

One of the most common types of life cycles is the product life cycle. This deals with how long products last in the market from development to decline by different companies, whether they are new/startups or established corporations.

The following are the five steps involved in the life cycle of a product (or service):

• Product Development Phase: This phase includes market analysis, product design, conception, and testing of a product or service. Funds from the initial start-up are typically used for this phase, and if revenue is low and development costs are high, it can be a period of low cash flow for the company.
• Market Introduction Phase: This marketing phase includes the initial release of the product, usually marked with high levels of advertising. At this stage, the company may be spending its capital in the hope of generating revenue in its next phase. The money for this phase usually comes from early investors, company owners, or suppliers.
• Growth Phase: This phase is when sales growth begins to accelerate, characterized by increasing sales year-over-year. As production levels increase, economies of scale may occur generating better margins. As such, more investment in growth is required. An increase in competition is probable, gross margins might then decline, making the product less profitable on a per-unit basis but the volume is higher. Cash flow and capital might come from profits, bank loans, partnerships, and rounds of investments from venture capital firms.
• Maturity Phase: In this stage of growth, a product will reach its peak demand in the cycle. Further spending on advertising will have little to no effect on increasing demand because it plateaus, and the cash flow streams come from higher profits due to economies of scale, established branding, supplier credit terms helping working capital due to volume buying, bank financing due to the business strong financial health. Private equity firms are interested in this cycle stage and company profiles.
• Decline/Stability Phase: The decline/stability phase arrives when a product has reached or passed its point of highest demand. At this point, demand will either remain steady or slowly decline as a newer product makes it obsolete.

Business Life Cycle

Businesses also have their own life cycle. This means they go through various stages that lead from their creation to their decline—just like products. The following are the most common stages in the life cycle of a company:

• Startup: This phase is characterized by research and development (R&D). This includes the type of business, the products and services they intend to sell, the costs associated with running the business, and how the company will be run, among other things. A business model is key during this stage, as it helps keep the owner(s) on track and can mean the difference between getting financing/raising initial capital and struggling to get off the ground. Once this is all done, the stage is set and the company can officially launch.
• Growth: This is the stage at which companies distinguish themselves from their competition in the market. Owners tend to (and should) focus on ways to grow and expand. This includes focusing on client relationships, increasing business investment, and seeking capital. Some companies may take on debt to finance their growth or may consider going public through an initial public offering (IPO). This is also a good time for business owners to identify and address any areas that may challenge or stunt growth.
• Maturity: The business should be established in the market by this point with a strong management team and dedicated employees. Annual growth should be consistent and there may even be opportunities for acquisitions, whether that's of a rival business or a new product line. Company owners may also want to consider spinning off business lines and/or products if this makes sense. Owners may want to reinvest their money for further growth or decide if it's time to cash out and sell their stakes.
• Decline: Revenue may rise and fall during the maturity stage. But if there are consistent drops, there's a good chance it's in decline. In order to save the company, a business owner should look at ways to turn it around. This may come through innovation. If this isn't possible, the only way to move forward is to reinvest or sell. Keep in mind that investment will cost more during this stage than the previous one and selling may be more difficult and come with a lower reward.

Understanding how these stages work can make a big difference to investors and, more importantly, to business owners. Many businesses fail to get off the ground during the startup phase because owners don't take enough time and rush through the process. Those who are well-prepared can ride the waves and better navigate themselves through any challenges that may arise to success.

Industry and Economy Life Cycle

Industries and economies often follow the same stages during their life cycles. These include:

• Expansion: Rapid growth, higher production levels, and lower interest rates occur during this time. Other factors that make up this stage include an uptick in employment, supply and demand of goods and services, and profits. There is the threat of inflationary pressures increasing when the economy expands too quickly.
• Peak: Growth hits the maximum rate during this stage. There are several key characteristics that stand out during this period—notably, a short-term stabilization in prices. This can be followed by a reversal downward. As such, there are normally imbalances that arise during the peak, which require correcting.
• Contraction: A slowdown of growth leads to a correction. This is characterized by higher unemployment, a drop in consumer demand, and higher supplies. Businesses and individuals start to curb costs and spending. Prices reach such a high point in the economy that intervention may be needed, such as increasing interest rates and/or increasing the money supply.
• Trough: This is the point where industries and economies reach their lowest point. For instance, demand wanes to the point where consumers don't spend as freely as before. Although things may be tough, the trough does provide an opportunity for companies and individuals to restructure their finances and their budgets.

The analysis of a business or company can show the stage a company is in and the same is true for an economy. By analyzing the four stages of a company's industry life cycle, financial decisions, like estimating forward-earning ratios and projecting future financial earnings and performance, can be made with greater knowledge.

Examples of Life Cycles

Tab Soda

Coca-Cola released this diet soda in 1963, decades before Diet Coke's heyday. Tab was the company's first foray into the diet drink market. The drink became popular in the 1970s and early 1980s. But its popularity fizzled out when Diet Coke created a decline in the Tab's market share.

Coca-Cola discontinued Tab in 2020, along with other products that were underperforming. This discontinuation marked the decline life cycle phase for the once-popular diet beverage.

Electric Cars

Electric cars are in their growth cycle as of April 2021. The global Electric Vehicles Market was worth approximately $140 billion in 2019, the most recent figures made available by Facts & Factors, which published a 175-page research report on the electric vehicle market.

The electric car is a prime example of a product in the growth phase. It is estimated that by 2026, the electric car market will hit $700 billion. And it's not just Tesla running the electric car charge anymore. Top market players also include Kia, Hyundai, BMW, Volkswagon, Ford, and Toyota.

The Bottom Line

In business, a life cycle is a way to describe the birth, growth and maturation, and eventual decline of a product or service. By understanding the sequence of events in a life cycle, companies can make better financial decisions. These steps include product development, market introduction, growth, maturity, and decline/stability, and in many ways, mirror the biological life cycle of a living organism. Managing the lifecycle of a product is helpful in many ways for a company, from getting a better understanding of how to improve on a new product, increasing marketing and sales, and reducing errors or waste, like the packaging.