What exactly does it mean to define your product’s exit strategy? Well, when thinking of the end of a product’s life in its market, think of the principles of product life cycle management and the four phases of a product’s life cycle. There’s the introduction phase, the growth phase, a peak phase, followed by a gradual decline phase. In some cases there’s a fifth phase called “rebirth & growth” and while rare, it does occur when a product’s popularity is rejuvenated.
An example of this fifth phase might be the rebirth of vinyl records, as today’s backlog on vinyl is close to 5 months long due to the renewed interest in this older media. However, for the most part, a product’s exit strategy typically involves maximizing gross profit in the 4th phase of decline and setting the stage for an easy exit. So what does this involve?
An exit strategy for a given product line typically involves outlining the company’s steps to reducing its exposure. After all, there’s no benefit to having an exit strategy if the company is left with inventory it can no longer sell. This means to account for a reduction in the company’s raw material requirements in manufacturing, reducing its marketing expenditures, liquidating any unused semi-finished or piece part inventory, and matching production volumes to customer demand. Granted, it’s quite an involved process.
Those companies that make it a point to outline their product’s exit strategy are far more inclined to maximize gross profit, when compared to those companies who don’t track their product’s life. It’s typically those unprepared companies that are left holding excess inventory and dwindling returns.
In the above graph the Y-axis (vertical) could represent millions of units sold, while the X-axis (horizontal) could represent number of years of sales
The above graph from the post Product Life-Cycle Management: Steal Market Share in the 4th Phase. It outlines the five aforementioned product life cycle phases. It’s during the fourth decline phase where companies must track market demand in order to avoid the costs of holding inventory it can no longer sell. During this period, companies must be able to accurately forecast customer demand in order to match production or volume to that demand.
It’s about producing exactly what’s needed in order to fulfill demand, but not going above and beyond what’s required in terms of expenditures. Granted, it’s not always easy, but it does get better when companies adopt an exit strategy for their product line. So, what should that exit strategy include and how can companies be better prepared during the fourth phase of product life cycle management?
1. Reducing the Risk of Inventory Obsolescence
No company wants to be left holding too much raw material, parts or semi-finished inventory it simply can’t sell. Inventory obsolescence is a huge cost of inventory, and in most cases, this inventory must be liquidated as scrap. An approach may be to retain the raw material needed to manufacture the product, but only manufacture based on “made-to-order” customer demand.
This means that the product will have a lead time and the company will only manufacture product based on advanced orders. This allows the company to avoid the labor costs associated with semi-finished & finished inventory. Instead, the company retains the raw material, waits for a customer order and then manufacturers the product.
2. Reducing Marketing Expenditures
Granted, during the fourth phase of product life cycle management, reducing marketing is pretty much a foregone conclusion. After all, if a company has made it this far within the product’s life, then they’ve done a fairly successful job of marketing it along the way. Still, it’s a good idea to reduce marketing expenditures during the initial portion of the fourth phase. In fact, most companies scale back their marketing expenditures when the product has reached the third "peak phase", or sometimes referred to as the market saturation phase.
3. Establishing Customer “Made-to-Order” Policies
When a company moves its approach from always having inventory available, to only manufacturing based on customer orders, they typically forget about the importance of properly managing their customer’s expectations. Deciding to pursue made-to-order business isn’t simply an internal decision.
It’s a decision that must be discussed with customers at length. Once they understand the reason behind the move, they’ll be better prepared to order in advance. In addition, it will help them better manage their own customer orders.
4. Maximizing Gross Profit in a Declining Market
Your product’s exit strategy must incorporate approaches to maximize your product’s gross profit in a declining market. This means to enact strategies to retain as much volume as possible. Using customer reward programs, prompt payment incentives and offering volume discounts, are just some of the ways to retain business.
The intention here is to maximize the product’s gross profit during its final life-cycle. It’s not easy, but it’s done all the time by companies who enact proactive strategies to retain their customer’s business. To read more about maximizing product in a declining market, please read: Maximize Your Product’s Gross Profit in a Declining Market
Coming up with a product’s exit strategy may seem like an involved process, but it really just involves making some minor changes to your company’s approach. Granted, some exit strategies include far more than what’s been covered here. However, the same principles apply. Define what stage your product is along its life cycle. Understand the eventual decline in customer demand. Reduce the company’s marketing expenditures. Reduce inventory exposure by relying less upon semi-finished and finished inventory. Move the product line to “made-to-order” status only. Doing this will avoid the extra labor costs of manufacturing product you don’t have an order for. Finally, retain as much business as possible by adopting proactive sales strategies that maximize your product’s gross profit.
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