The Product Life Cycle
By Amy Kendall, Research Education Specialist
Remember my example of the ball? We discussed how you can determine the direction a ball is traveling from several single-frame photos, and discovered that 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 examine why supply and demand fluctuate and how they affect 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 to know where your product is in its life cycle.
Every product goes through a cycle that begins with a little interest, then attracts more buyers (demand) and not enough sellers (supply), and gradually ends up with too many sellers (supply) and not enough buyers (demand).
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 not yet a lot of supply. This means that both supply and demand increase during this phase. You’ll know your product is in this phase if demand is very high, measured by its Listing Success Rate, and supply is still low, measured by its 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 a product in the Early Phase, we can predict that both supply and demand will increase, along with the number of sales. These increases continue until the product reaches the point of market saturation.
But, like we talked about in our last article, we can’t use a single snapshot to decide which direction a product is moving! Figure 3, below, confirms that all of those key supply and demand indicators are on the rise by showing research from a later point in time.
Figure 3: Early Phase with Rising LSR and Average Revenue per Seller
Figure 3 shows that our anticipations were correct, by showing results for the same product, just at a later point in time. The comparison is what tells us where the product is in its life cycle. Our supply has increased from 451 listings to 795, and our demand has increased with LSR rising from 62.97% to 69.25%.
But along with these increases, we also have more sellers in the market; there are 188 compared to the original 138. And 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.
In this stage, demand is still high but the number of listings (supply) is going to quickly catch up to balance the demand. The number of listings rises while the LSR remains steady to achieve that balance. The number of sellers also increases dramatically, generating the competition that gives this stage its name.
Figure 4: Competition Phase with Rising Competition and Number of Sellers
Figure 4 again shows the same product at a later time. We can see that both the number of listings and the number of sellers have 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 not shortage (supply matches demand), the price is inevitably going to be lower than the 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 LSR), and there is way too much competition for most people to make break-even prices (there are more than 2,300 sellers). Compare the results in Figure 5 to those in the Early and Competition Phases.
Figure5: Decay Phase with Maximum Competition and Plummeting LSR
This final figure shows the same product one last time. We can tell that the product has hit the decay phase because of the huge number of listings, enormous number of sellers, falling sales price, and plummeting listing success rate.
Sellers were attracted to the market because others were making a decent profit, but now we can see that supply has surpassed demand, which has caused the drastic decrease in listing success rate and average sales price.
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. Demand is very high and supply is low.
Competition Phase – Demand is leveling off, supply is increasing. Selling here 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 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 falling is to compare one time-frame 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 and 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 the 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 a market for specific products
- Decide whether to liquidate your inventory as it enters the decay phase
And see, you probably thought you would never use a thing you learned in high school economics, but here you are using it for your everyday eBay sales!
Now that we’ve talked about how to monitor a product’s market and lifecycle I’m sure you’re wondering how to find those successful products. Well, look forward to the last article in our series that will show you how to use HammerTap to find the hot products!
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