The Product Life Cycle and The Law of Diminishing Returns: An Union of Marketing Management and Economics

By: Anamitra Roy

B.Com. Hons. (University of Calcutta, India), Certified Financial Accountant (CMC, India),DFA (CMC, India), PGDBF (HSIS India, India), Certified Business Case Analyst (TASMAC, India), Certified Financial Accountant (GLOBSYN Skills, India), GPBL (TASMAC & University of Wales, U.K.).

One of the most important concepts associated with modern day marketing management is that of the product life cycle. In this concept, the life span of a product is classified broadly into three classifications, which are as follows:

  1. The Phase of Introduction/ Development: This is the first phase of the product life cycle. In this stage the product gets developed. It gets introduced in the market. In this phase the entrepreneur has to work very hard to make the customers familiar with the product. Some marketing management scholars also prefer to call it the phase of formation.
  2. The Phase of Maturity: This is the second phase of the product life cycle. In this stage the product reaches a state of maturity and customers are very familiar with it. The product has the highest aggregate demand in the market at this stage. This is the stage when the entrepreneur earns the highest amount of profit and holds the lion’s share of the market sales.
  3. The Phase of Declining: The third and final phase of the product life cycle can be delayed but it cannot be eradicated.This is the third and final phase of the product life cycle. In this stage the demand for the product starts to come down in the market, thereby, bringing the profit margin also to an all time low. Another major characteristic feature of the declining phase from the point of view of human resource management is that motivation level of the employer and the employees also continue to go down.

Every product in the world has to undergo these three phases of the product life cycle irrespective of the nature and utility of it.

Quite similar to the product life cycle of marketing management there is a law in economics. This is called the “Law of Diminishing Returns.” This law deals with the diminishing returns/ utility value from the continuous use of a resource. For example, when a person is having a bottle of soft drinks say the utility derived out of that is “x”. Now on having the second bottle of soft drinks the utility value comes down to lesser than “x”. On having one more bottle of soft drink the utility value comes down further and it continues this way until at one point of time the utility value reaches the zero mark.

There are some points of similarity between the product life cycle of marketing management and the “Law of Diminishing Returns” of economics. A discussion on these is as follows:

  1. Based on the fundamental principle of diminishing marginal utility: In case of both the concept of product life cycle and the “Law of Diminishing Returns”, the marginal utility comes down due to factors like -Marginal utility is the utility of having an additional unit of the product. In the concept of product life cycle the demand for the product slowly and gradually comes down and then fades away. In the “Law of Diminishing Returns” also the same principle of diminishing marginal utility is used as a base.
  • Fatigue generated out of regular usage.
  • Monotony.
  • Changes in consumer behavior leading to alterations in tastes, preferences, buying and usage patterns of consumers.
  • Introduction of superior quality products in the market.
  • Improvement of competitors in terms of technology, management etc.
  • Rise in awareness leading to optimum usage of resources, thereby bringing the cost of substitute products down in the markets.

2. Applicable in case of individual and aggregate use: The concept of product life cycle and the “Law of Diminishing Returns” can be used in case of individual as well as aggregate usage of the market. The individual usage added together produces the aggregate usage.

3. Applicable in case of all types of products: In case of medicines and cancer drugs, the utility (satisfaction) value remains the same even after repeated usage. Hence, the demand for these commodities does not fall as per the “Theory of Marginal Utility.”

Giffen goods have been named after the famous Scottish economist Sir Robert Giffen. The world famous economist Alfred Marshall attributed this idea to Sir Robert Giffen in his book “Principles of Economics”. In economics and consumer theory, a Giffen good is a commodity whose demand does not fall with the rise in prices and vice versa. Examples of such goods are luxury goods like perfumes, art pieces, paintings etc.

Both the ideas in the discussion are applicable in case of all types of products. However there are some exceptions to it. Examples of these are medicines, cancer drugs, Giffen goods etc.

In spite of these similarities, there is a strong dissimilarity between the idea of product life cycle and the “Law of Diminishing Returns”. This difference is in the approach. The idea of product life cycle approaches to study the law of diminishing marginal utility from the stand point of a product. On the other hand, the “Law of Diminishing Returns” approaches to study marginal utility from the standpoint of utility or satisfaction.

In reality it is seen that the “Law of Diminishing Returns” is used to analyze the product life cycle. The stats of changing/ diminishing returns help us to understand in which phase of product life cycle the product is existing right now.

In this context, let me talk about one of my experiences.

In 2011 -12, I was working as the Centre Manager of the CMC Academy, Salt Lake City Branch which was situated in Salt Lake City, Kolkata, India. As the head of the organization I was very worried since September, 2011, as my business acquisition figures went drastically down and could not be pulled up despite measures taken by the marketing team. It was on January, 2012 we decided to interview the existing students of the institute on the basis of a questionnaire. This was being done with the objective of judging their satisfaction level. After the interview and in consultation of my bosses we realized that the academic courses being taught in the institute had reached a point of saturation. The stats revealed that following the “Law of Diminishing Returns”, the satisfaction generated from the academic courses taught in the institute were coming down like a house of cards, there by taking the whole institute towards the third and declining phase of the product life cycle.

We had limited time in our hands as we had to reach targets. We got tied up with the National Institute of Entrepreneurship and Small Business Development”. There was a flow of new products in the form of a new advance course on web designing. Our marketing team conducted two seminars at a nearby government college and we had 50 more students in just a month. By March, 2012 things were back in shape again. Organizational happiness and stability were restored.

In my professional career, this was a classical example of the “Law of Diminishing Returns” used to determine the phase of the product life cycle in which our products were placed. This is how, I realized about the union between marketing management and economics through the application of the concept of the product life cycle and the “Law of Diminishing Returns”.

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