The Product Life Cycle

The product life cycle (PLC) is a concept used to describe the course that a product’s sales and profits take over what is referred to as the lifetime of the product, from its inception to its demise.

It is characterized by four distinct stages: introduction, growth, maturity, and decline. Preceding this is the product development stage, before the product is introduced into the marketplace. The introduction stage is typically a period of slow growth as the product is launched into the marketplace. Profits are nonexistent because of heavy marketing expenses. The growth stage is a period of rapid acceptance into the marketplace during which profits increase. Maturity is a period of leveling in sales mainly because the market is saturated—most consumers have already purchased the product. Marketing is more expensive (to the point of diminishing returns) as efforts are made to reach resistant customers and to stave off competition. Decline is the period when sales fall off and profits are reduced. At this point, prices are cut to maintain market share (Kotler and Armstrong, 1996).

The PLC can apply to a variety of situations such as products (a particular album), product forms (artists and music genres), and even product classes (cassettes, CDs, and vinyl) that are referred to as formats in the music business. Product formats have the longest life cycle—the compact disc has been around since the early 1980s (and is currently in the decline phase). However, the life cycle of an average album release is 12–18 months. It is at this point that the label will generally terminate most marketing efforts and rely on catalog sales to deplete remaining inventory. When a product reaches the decline stage, the company may withdraw from the market or, as in the case of vinyl records, efforts or circumstances may lead to a revival of the product that will sustain a smaller number of competitors for an extended maturity stage.

Figure 2.1

Not all products will have the nice bell shaped curve. A hit song may have a very steep, short introduction and growth stage and just as steep and quick decline, looking more like an inverted V than a bell. Other products, like vinyl records, may never be withdrawn from the market but, instead, achieve a mature stage where sales level off and maintain a steady, albeit lower, level of sales for many years.

Diffusion of Innovations

When a product is introduced into the marketplace, its consumption is expected to follow a pattern of diffusion. Diffusion of innovations is defined as the process by which the use of an innovation is spread within a market group, over time and over various categories of adopters (American Marketing Association, 2004). The concept of diffusion of innovations describes how a product typically is adopted by the marketplace and what factors can influence the rate (how fast) or level (how widespread) of adoption. The rate of adoption is dependent on consumer traits, the product, and the company’s marketing efforts.

Consumers are considered adopters if they have purchased and used the product. Potential adopters go through distinct stages when deciding whether to adopt (purchase) or reject a new product. These stages are referred to as AIDA, which under one model (affective or driven by emotion) is represented as attention, interest, desire, and action. Another model (cognitive or driven by logic) uses awareness, information, decision, and action. These stages describe the psychological progress a buyer must go through in order to get to the actual purchase. First, a consumer becomes aware that they need to make a purchase in this product category. Perhaps the music consumer has grown tired of his or her collection and directs their attention toward buying more music. The consumer then seeks out information on new releases and begins to gain an interest in something in particular, perhaps after hearing a song on the radio or attending a concert. The consumer then makes the decision (and desires) to purchase a particular recording. The action is the actual purchase. Some products (like a car, or music to study by) have elements of both the emotional and the logical models present in the decision-making process.

Figure 2.2 The AIDA decision-making process

This process may take only seconds or may take weeks, depending on the importance of the decision and the risk involved in making the wrong decision. Purchase involvement refers to the amount of time and effort a buyer invests in the search, evaluation, and decision processes of consumer behavior. If the consumer is not discriminating or the consequences of a poor decision is not a major financial or social risk, then the process may take only moments and is thus a low-involvement decision. On the other hand, if the item is expensive, such as a new car, or highly visible, like clothing, and if consequences of a wrong decision are severe, then the process may take much longer. Several factors influence the consumers’ level of involvement in the purchase process, including previous experience, ease of purchase, product involvement, and perceived risk of negative consequences. As relative cost increases, so does the level of involvement.

Consumers who adopt a new product are segmented into five categories:

• Innovators
• Early adopters
• Early majority
• Late majority
• Laggards

Innovators are the first 2.5% of the market (Rodgers, 1995) and are eager to try new products. Innovators are above average in income and thus the cost of the product is not of much concern. Early adopters are the next 13.5% of the market, and adopt once the innovators have demonstrated that the new product is viable. Early adopters are more socially involved and are considered opinion leaders. Their enthusiasm for the new product will do much to assist its diffusion to the majority. The early majority is the next 34% and will weigh the merits before deciding to adopt. They rely on the opinions of the early adopters. The late majority represents the next 34%, and these consumers adopt when most of their friends have. The laggards are the last 16% of the market and generally adopt only when they feel they have no choice. Laggards adopt a product when it has reached the maturity stage and is being “deep discounted” or is widely available at discount stores. When introducing a new product, marketers target the innovators and early adopters. They will help promote the product through word of mouth. How the adopter categories drive the product life cycle is shown in Figure 2.1.

Products (or innovations) also possess characteristics that influence the rate and level of adoption. Those include:

• Relative advantage: the degree to which an innovation is perceived as better than what it supersedes. Cassette tapes were perceived to be superior to vinyl because they could be played on portable devices.
• Compatibility: the degree to which an innovation is perceived as consistent with existing values and experiences. Using a 4K TV is no different than using an HD TV, it just looks better.
• Complexity: the degree to which an innovation is perceived as difficult to understand and use. If your VCR is still flashing 12:00 then you are not an early adopter and complexity may be an issue that keeps you from adopting new technology.
• Trialability: the degree to which an innovation may be experimented with on a limited basis. This is why artists should give away free songs and allow sampling of every song on their new albums.
• Observability or communicability: the degree to which the results of an innovation are visible to or can be communicated to others.” The more easily you can see or hear the difference, the faster consumers can make a decision to adopt, or not. (Rogers, 1995)

One way marketers can increase the potential for success is by allowing customers to “try before they buy.” Listening stations in retail stores and online music samples have increased the level of trialability of new music. Marketers can improve sales numbers by ensuring the product has a relative advantage, that it is compatible, that it is not complex, and that consumers can observe and try it before they purchase.

Hedonic Responses to Music

Researchers in the fields of psychology and marketing strive to understand the hedonic responses to music. Hedonic is defined as “of, relating to, or marked by pleasure.” Hedonic products are those whose consumption is primarily characterized by an affective or emotional experience. It is a study of why people enjoy listening to music and what motivates them to seek out music for this emotion-altering experience. Recorded music is considered a tangible hedonic product, compared to viewing a movie or attending a concert, which is an intangible hedonic product. “The purchase of a tangible hedonic portfolio product, such as a CD, gives the consumer something to take home and experience at her convenience, possibly repeatedly” (Moe and Fader, 1999). This convenience factor has fueled the increase in consumption of music, despite the fact that sales of recorded music have been falling this century.

Consumers like music for a variety of reasons, mostly connected to emotions or emotional responses to social situations involving music. A brief glance through articles and studies offers the following reasons:

• To evoke an emotional feeling or regulate a mood
• To evoke a memory or reminisce
• As a distraction or escape from reality
• To create a mood in an environmental setting or a cultural/sporting event
• To combat loneliness and provide companionship
• To foster social interaction with peers
• To calm and relax
• To stimulate (such as to stay awake while driving)
• For dancing or other aerobic performances
• To enhance/reinforce religious or cultural experiences
• For therapeutic purposes (such as pain reduction)
• To pass the time while working or waiting

By understanding the situations that drive consumers to purchase or consume music, marketers can be more effective in providing the right music to the right customers at the right time. Even retail placement of music can benefit from understanding the context in which the music will be consumed. For example, music designed to inspire sports fans may be made available in locations that fans are likely to visit on their way to or while attending a sporting event.

Figure 2.3

Cost-Based Pricing

Cost-based pricing is achieved by determining the cost of product development and manufacturing, marketing and distribution, and company overhead. Then an amount is added to cover the company’s profit goal. The weakness with this method is that it does not take into account competition and consumer demand.

When determining cost-based pricing, consideration must be given to the fixed costs of running a business, the variable costs of manufacturing products, and the costs related to marketing and product development. Fixed costs include items such as overhead, salaries, utilities, mortgages, and other costs that are not related to the quantity of goods produced and sold. In most business situations, variable costs are usually associated with manufacturing and vary depending on the number of units produced. For recorded music, that would include discs, CD booklets, jewel cases, and other packaging. However, within the marketing budget of a record label, the costs of manufacturing and mechanical royalties are considered fixed once the number of units to be manufactured is determined and the recording costs have been computed. Then there are other (semi) variable costs, which can vary widely, but are not directly related to the quantity of the product manufactured. They would include recording costs (A&R) and marketing costs. For purposes of the formula below, the costs of marketing are considered variable costs, and the recording and manufacturing costs, having already been determined for the project, are considered fixed at this point.

Competition-Based Pricing

Competition-based pricing attempts to set prices based on those charged by the company’s competitors—rather than demand or cost considerations. The company may charge more, the same, or less than its competitors, depending on its customers, product image, consumer loyalty, and other factors.

Companies may use an attractive price on one product to lure consumers away from the competition to stimulate demand for their other products. This is known as leader pricing. The item is priced below the optimum price in hopes that sales of other products with higher margins will make up the difference or that purchase will create brand loyalty. The most extreme case of this is loss leader pricing. Under loss leader pricing, the company actually loses money on one product in an attempt to bring in customers who will purchase other products that are more profitable. Compact discs were once used by retailers like Best Buy and Circuit City (who are now out of business) as loss leaders because they believed it would generate traffic to the store and increase sales of other, more profitable items. Record labels responded to the cries of independent record stores (who had no high margin appliances to sell) by instituting a minimum advertised price policy (MAP). Lawsuits were filed to overturn MAP, but before a decision could be reached, the practice ended because the stores realized that CDs were not an effective loss leader. Consumers did not simply return to the store where they bought CDs to buy refrigerators. They went online and found the best deal they could and spent the money they saved on cheap CDs at the appliance store!

Companies are prohibited from coordinating pricing policies to maximize profits and reduce competitive pricing. Such price fixing is illegal under the Sherman Act (1890), which prevents businesses from conspiring to set prices (Finch, 1996). The Robinson-Patman Act (1936) prohibits any form of price discrimination, making it illegal for manufacturers to sell products to competing wholesale or retail buyers at different prices unless those price differentials can be justified. But neither of these laws keeps competitors from shopping the competition and adjusting their prices accordingly, nor does it keep retailers like Wal-Mart or Apple from dictating prices because of their power in the distribution channel.

Value-Based (Consumer-Based) Pricing

Consumer-based pricing uses the buyer’s perceptions of value, a reversal from the cost-plus approach. The music business has at times sought to maintain a high-perceived value for compact discs by tweaking and repackaging the product. Lady Gaga, U2, Green Day, Eric Clapton and others have released special editions or boxed sets of albums in addition to the standard versions. Consumers are willing to pay a premium price well beyond the economic value of these special editions because they are limited releases or have exclusive content. This same concept is applied in the concert side of the industry which is selling deluxe packages that may include special items, meals, and a meet and greet with the artist, priced well beyond the actual costs and any normal profit, just because fans are willing to pay for the experience.

In an effort to maintain the perceived value of recorded music, record labels are now focusing on how to add value to music downloads, which provide a limited amount of value-added materials compared to a physical CD. Electronic “digital booklets” are available to consumers who download albums. These digital booklets, usually in PDF file form, contain the artwork, liner notes, and lyrics normally found in a CD booklet.

Crowdfunding

A recent trend in the arts and entertainment industries is the use of crowdfunding to finance new projects. Crowdfunding is the collecting of money from multiple sources to fund the production or venture rather than getting the funding from a single source. Crowdfunding replaces the label and gives the artist greater control over the project. Several companies offer crowdfunding services to would-be artists, the most popular being Kickstarter. For their services Kickstarter takes 5% of the money from successfully funded projects. Their financial partners, PayPal in the U.S., take another 5%. Kickstarter only collects money from project supporters if the fundraising goal is met; however competitors like Indiegogo have options that allow the artist to keep whatever is raised, less the fees, of course. To attract supporters, artists typically offer incentives ranging from a free download for a $1 donation to a house party for a donation in the thousands.

Crowdfunding has not been without its controversies. Because the company gets a percentage of the money raised, there is no incentive for them to cut off the fund-raising when the artist reaches the goal. In the case of former Roadrunner Records artist Amanda Palmer, more than 10 times the original goal was raised. This raises ethical issues for both the artist and for Kickstarter (Clover, 2012).

Name Your Own Price

Radiohead was one of the first to use “name your own pricing” methods to sell their albums. After a small fee of about $.25 the fan could pay whatever price they wanted to download the entire In Rainbows album. The idea was great publicity and it probably made the band more money than they would have made with a record label; still, most people paid less than three dollars for the download. Both Palmer and Radiohead have the advantage of having once been on a major label and had household-name recognition. For a new, or independent artist, these types of funding are difficult to achieve.

Figure 2.4

Basic Promotion Strategies: Push vs. Pull

There are two basic promotion strategies: push promotion and pull promotion. A push strategy involves “pushing the product through the distribution channel to its final destination in the hands of consumers.” Marketing activities are directed at motivating channel members (wholesalers, distributors, and retailers) to carry the product and promote it to the next level in the channel. In other words, wholesalers would be motivated to inspire retailers to order and sell more product. This can be achieved through offering monetary incentives, discounts, free goods, advertising allowances, contests, and display allowances. All marketing activities are directed toward these channel members and are regarded as “trade” promotion and “trade” advertising. With the push strategy, chan nel members are motivated to “push” the product through the channel and ultimately on to the consumer.

Figure 2.5

Under the pull strategy, the company directs its marketing activities toward the final consumer, creating a demand for the product that will ultimately be fulfilled as requests for product are made from the consumer to the retailer, and then from the retailer to the wholesaler. This is achieved by targeting consumers through advertising in consumer publications and creating “consumer promotions.” With a pull strategy, consumer demand pulls the product through the channels. Years ago, when MTV still played music videos, they employed a pull strategy to get onto more cable systems, imploring teenagers to call their cable operators and tell them “I want my MTV.” The campaign was so creative that it was immortalized in Dire Strait’s song “Money for Nothing.”

Different record companies have different philosophies on the emphasis of the two strategies. Some companies employ a balanced combination of consumer advertising and consumer promotions (coupons and sale items) and trade promotion (incentives), while others focus on consumers and a pull strategy, relying on the sales and promotions departments to win over retailers and radio, respectively.

Figure 2.6 Push vs. Pull Marketing Strategy

Distribution Systems

Most distribution systems are made up of channel intermediaries such as wholesalers and retailers. These channel members are responsible for aggregating large quantities and assortments of merchandise and dispersing smaller quantities to the next level in the channel (such as from manufacturer to wholesaler to retailer). Manufacturers engage the services of distributors or wholesalers because of their superior efficiency in making goods widely accessible to target markets (Kotler, 1980).

Figure 2.7 Distribution Models

The effectiveness of intermediaries can be demonstrated in figure 2.6. In the first example, no intermediary exists and each manufacturer must engage with each retailer on an ongoing basis. Thus, the number of contacts equals the number of manufacturers multiplied by the number of customers or retailers (M × C). In the second example, a distributor is included with each manufacturer and each customer contacting only the distributor. The total number of contacts is the number of manufacturers plus the number of customers (M + C).

Types of Distribution Systems

Three basic types of physical distribution systems are corporate, contractual, and administered. All three are employed in the record business.

Corporate systems involve having one company own all distribution members at the other levels in the channel. A record label would use a distribution system owned by the parent company, as well as a company-owned retailer in a fully integrated corporate system. In reality, the major record labels do not own record retailers, but they do own their own distribution. Such is the relationship between Mercury Records and Universal Music and Video Distribution. Both companies are owned by Universal Music Group. This type of ownership is often referred to as vertical integration or a vertical marketing system (VMS). When a manufacturer owns its distributors, it is called forward vertical integration. When a retailer such as Wal-Mart develops its own distribution or manufacturing firms, it is called backward vertical integration.

Contractual distribution systems are formed by independent members who contract with each other, setting up an agreement for one company to distribute goods made by the other company. Independent record labels commonly set up such agreements with independent record distributors. Before the major record labels developed in-house distribution systems in the 1960s and 1970s, nearly all recorded music was handled through this type of arrangement.

Figure 2.8 Distribution Chain

In administered distribution systems, arrangements are made for a dominant channel member to distribute products developed by an independent manufacturer. This type of arrangement is common for independent record labels that have agreements to be handled by the distribution branch of one of the major labels. However, branch distribution is on the decline as major labels shift resources away from physical product and toward digital distribution. Digital distribution systems will be addressed in the chapter on distribution and retail.

Price and Positioning

Several years ago, the retail industry developed marketing tools to measure the effectiveness of product location in their stores. Universal product codes (UPC), or bar codes, and computerized scanners have helped retailers to determine the optimal arrangement of products within the store. They can move products around to various locations and note its effects on sales. As a result, retailers are charging manufacturers a rental fee for prime space in the store, including counter space, end caps, and special displays. Retail stores sometimes charge slotting fees—a flat fee charged to the manufacturer for placement of products on the shelves for a limited period of time. If the product fails to sell, the retail store has reduced its risk. A similar concept has developed in the record business, but it is also tied to promotion and favorable location for the product. It is referred to as price and position and will be discussed in Chapter 15.