Economics Part 2: Understanding the Product Life Cycle
Part Two of a two-part Series on Supply and Demand (Part 1)
By Steve Nye, eBay Certified Consultant
Remember my example of the ball? We discovered that you can determine the direction a ball is traveling from several single-frame photos. Likewise, we can determine the direction of the supply and demand for a product on eBay the same way.
But today let´s step back and look at the picture. Let´s answer why supply and demand fluctuates and how it affects what we call the product life cycle.
Where is Your Product in Its Life Cycle?
It´s one thing to know the supply and demand for your product, which is what we learned last time. However, it´s a completely different story know where your product is in its life cycle.
You may recall this nifty little figure I used last time to help illustrate the cycle that each product goes through, both online and in retail outlets.
Figure 1: The Product Life Cycle
In order to know where you product is in the cycle, you need to understand the cycle itself. Let´s talk about each phase in more detail.
In the Early Phase, interest is just waking up, but there´s still not a lot of supply. This means that both supply and demand increase during this phase. You know your product is in this phase if demand is very high, measured by Listing Success Rate, and supply is still low, measured by Total Listings.
Figure 2: Early Phase with Rising LSR and Sales Per Seller
Figure 2 shows a product near the beginning of the Early Phase. Demand is relatively high (nearly 63%) while supply is rather low (451 listings). We can also see that the number of sellers is low, at 138.
Since this is the case, we can anticipate that both supply and demand will increase, along with the number of sales. This means that demand for the product is rising to match market saturation.
But, as I mentioned earlier, we can´t use a single snapshot to decide whether the product is in early life phase. Figure 3 below, using research from a later period of time, confirms that the product´s success rate and revenue per seller are both on the rise.
Figure 3: Early Phase with Rising LSR and Average Revenue Per Seller
Here is the same product again, at a later point in time. The comparison is what tells us where the product is in its life cycle now. Figure 3 shows that our anticipations were correct. Our supply has increased from 451 listings to 795 listings. Our demand has increased, with LSR rising from 62.97% to 69.25%.
But along with this increase, we also have more sellers in the market, with 188 instead of only 138 when we started. Figure 3 also shows that each seller is making a much higher profit than they were before: $16.26 more, to be exact.
Because many sellers are making a nice profit with little competition in the Early Phase, other sellers will be drawn to the market.
Although demand is still high, the number of listings (supply) is going to quickly catch up and balance out with demand. As the number of listings increases, the LSR remains steady (this is the balance). Also, the number of sellers is increasing dramatically. These are all indicators that we are well into the Competition Phase.
Figure 4: Competition Phase with Rising Competition and Sellers with
Figure 4 illustrates the same product much later in time. We can see that the number of listings and the number of sellers has drastically increased. However, sales rates have remained steady and the sales price has dropped.
We know we´ve hit the Competition Phase when supply rises to match demand. There is no shortage, and there seems to be little surplus. But, because there is no shortage, the price is inevitably going to be lower than Early Phase.
During the Decay Phase, the market is completely saturated (notice 20,000 listings in Figure 5 below). Demand is dropping off (reflected in the LSR), and there is way too much competition for most people to make break-even prices (more than 2,300 sellers). Compare the results in Figure 5 with those in the Early and Competition Phases.
Figure 5: Decay Phase with Maximum Competition and Plummeting
Life-Cycle Strategies are Based on Demand
Here´s a summary of the life-cycle and some strategies you can use, depending on where your products fit in the cycle.
Early Phase: Demand is high, supply is low. Product is very expensive early on in the product cycle, but if your sources can get you a sellable product with a window of opportunity before it is available to the general marketplace, you can expect to make some of the highest profits on eBay during this stage.
Competition Phase: Demand is leveling off, supply is increasing. This phase is where most traditional businesses compete. Higher margins come from efficiency, good supply relationships, and volume discounts. However, sellers must constantly be aware of the upcoming shift to the end of the product life cycle.
Decay Phase: Demand is dropping like a rock, supply is completely saturated. Selling here is tricky, risky, and timing-intensive. The goal is to buy product in volume just as it hits liquidation channels but before demand has dried up as the result of market saturation or the public´s anticipation of the replacement product. There is usually a window here where sellers can make a small profit by buying at liquidation prices and selling at near-retail prices, but this is a usually a very small window.
Your Sales Plans Should Depend on Demand
I can´t stress this enough. The only way to know whether demand is rising or lowering is to compare one timeframe against another. I suggest that you run week-over-week research for a four-week period to get a good picture of the movement of supply demand. Then you can save your reports and start comparing month-to-month to determine where your product is headed in its life cycle. This way, you can watch the balance between supply and demand over time, and thus be able to enter and exit the market at optimal times.
Imagine how your knowledge of demand for a product is going to influence your sales plans. With this knowledge, you will be able to:
- Decide whether to sell a specific product
- Decide whether to renew a product sourcing contract
- Decide when to enter and exit the market with specific products
- Decide whether to liquidate your inventory as it enters the decay phase
And see, you probably thought you´d never use a thing you learned in high school economics! But here you are, using it for your everyday eBay sales!