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Wednesday, October 31, 2012

Product Life-cycle and Diffusion

Network effects and their network-size related counterparts described by Zipf’s law and Dunbar’s number are not the only factors that affect the fate of a product. This problem runs deep in the marketing literature where two models stand out, namely, product life-cycle (PLC) and diffusion.

According to the PLC model, the life-time sales of a product follow a bell-shaped curve going through five stages: development, introduction, growth, maturity, and decline. This model is widely used but has some important shortcomings: many products never get past development and most successful products never die. Moreover, its stages can be further blurred when firms manage to reinvent themselves causing the life cycle to speed up, slow down, or even recycle. Still, the PLC remains popular in the high-tech as it intuitively describes a number of market phenomena including that of a “fad” product, i.e. a product that exhibits a steeply sloped growth stage, a short maturity stage, and a steeply sloped decline stage.

A related but distinct module is diffusion that is defined as the process by which an innovation is communicated through certain channels over time among the members of a social system. Innovation adopter categories (the classification of members of a social system on the basis of innovativeness) include: innovators, early adopters, early majority, late majority, and laggards. Generally speaking, diffusion encompasses the adoption process of several individuals over time and the figure below shows how it can be overlaid over the PLC.
 
Product Life-cycle and Diffusion Overlaid
  
--- to be continued next week ---

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