Life cycle costing 华依伊 郑思慧 吴珂 张哲华

01 General introduction Applications Comparison contents

Product life cycle costs Design stage development Market launch Production and sales withdrawal It incurred from the design stage through development to market launch, production and sales, and their eventual withdrawal from the market.

Life cycle costing

Characteristics of the product life cycle StageSales volumecosts Development NoneR&D IntroductionVery low levelsVery high FC GrowthRapid increaseIncrease in VC, some FC increase MaturityStable high volumePrimarily VC DeclineFalling demandPrimarily VC

The returns Performance measure IntroductionGrowthMaturityDecline CashNet user Generator Return on capital Not important Important GrowthVital Growth with new users Negative growth ProfitNot expectedimportantImportant

How to maximise the return over the product life cycle Design costs out of products Minimise the time to market Minimise breakeven time Maximise the length of the life span Minimise product proliferation Manage the product’s cash flows

Design stage 70%~90% Decision made early in the life cycle Careful design minimum cost Design costs out of products

Release Minimise the time to market Get the product to the market place as soon as possible Without rival Increase market share Life span Extra costs to speed up the launch

Growth Minimise breakeven time Important Repaid the R&D costs Funds to develop further products

Maximise the length of the life span Life span Actions of management and competitors 1.A number of different uses. Time Sales revenue 2.Enter different national or regional markets one after another. Maximise revenue Early presence in a particular market

Short life cycle environment Minimise Product proliferation Be Updated or superseded too quickly Life cycle is cut short Just cover its R&D before its successor is launched

Manage the product’s cash flows (a) (b) (c) (d) ConceptDevelopmentManufacturing and sales Release Time (months) Cumulative costs and revenues(`000) Sales Profit Investment (a)Time to market (b)Breakeven time (c)Breakeven time after product launch (d)Return factor Return map

Life cycle costs and marketing strategies Marketing mix(4p) --Product --Price --Place(distribution) --Promotion Decline stage Introduction stage Growth stage Maturity stage

Introduction Stage Establish a market and build demand ● Product:one or two ● Pricing:high or low ● Distribution:selective and scattered ● Promotion:build brand awareness

Growth Stage Gain consumer preference and increase sales. ● Product :improvements ● Price :high or be reduced ● Distribution:more intensive ● Promotion :a broader audience

Maturity Stage Maintain market share and extend the product’s life cycle ● Product :differentiate the product from competitors ● Pricing :may be cut ● Distribution :new distribution channels, incentives ● Promotion :build brand loyalty

Decline Stage Three opinions (a)(b)(c) ● Product :reduce number ● Price :reduce ● Distribution :unprofitable channels are no longer used ● Promotion : reinforce brand image of remaining products

Advantages: It offers a framework within which alternative marketing strategies can be planned. Disadvantages: The concept is not always an accurate tool for sales forecasting purpose because the life cycle curves of different products vary immensely. Impacts of the product life cycle concept for marketing strategies

Traditional management accounting system 1.The system don't accumulate costs over the entire life cycle. 2.It writes off these costs on an annual basis against the revenue generated by existing products 3.It makes the existing products seem less profitable which may lead these products be scrapped too quickly.

Life-cycle costing 1.It focuses on costs over the product's entire life cycle to determine whether profits earned during the manufacturing. 2.The true profitability of the product can be assessed. 3.All non-production costs are traced to individual products.

Service life cycles The only difference is that the RD stages will not exist in the same way and will not have the same impact on subsequent costs. Project life cycles The project should be monitored carefully to make sure that cost overruns are not being incurred.

Customer life cycle 1.The aim is to extend the life cycle of a particular customer which means encouraging customer loyalty. 2.Customers become more profitable over their life cycle. 3.It highlights the worth of customers and the importance of customer retention.

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