This post is a business case study on Pepsi’s product life cycle. This is a valuable tool for marketers to manage the product as it progresses through its life cycle. Managers are encouraged to anticipate industry changes and have strategies in place for each stage – it promotes a proactive planning approach.
There are five key stages of the product life cycle:
1) Pre-launch – no sales and profit are made because the product is still in development.
2) Introduction – initial sales are made to innovators, consumers who enjoy trying new products, but these are insufficient to recuperate development costs
3) Growth – sales being to increase rapidly as the product gains popularity among the early majority. It is at this stage that profits are first generated.
4) Maturity – this is the longest stage and generates the majority of a product’s sales and profits from the late majority. To ‘milk’ the product for as much profit as possible, extension strategies are often implemented to pro-long the maturity stage.
5) Decline – eventually all products stop selling, such as VHS tapes. As expected, sales begin to decline until the product is no longer profitable.
At each stage, marketers should adapt their marketing strategies to the external changes in the market place. Let’s take a look at how PepsiCo have used the product life cycle to successful grow Pepsi into one of the most consumed drinks in the world.
Product Life Cycle of Pepsi:
1) Pre-launch – the 1890s
In 1898, pharmacist Caleb Bradham developed ‘Brads Drink’, a formula designed aid digestion. After strong interest from consumers in his pharmacy, Brad renames the drink ‘Pepsi-Cola’ and purchases the trademark ‘Pep Cola’ for $100. The origins of Pepsi are very similar to that of Lucozade, which was also first produced for medicinal purposes.
Although $100 does not appear much, adjusted for inflation that amount of money in the 19th Century is equivalent to $2516.34 in 2014. This highlights the difficulties companies have in the pre-launch phases with surviving periods of negative cash-flow, large research costs and development expenditure.
2) Introduction – 1902
Brad began selling Pepsi-Cola and achieved sales of 7,968 gallons of syrup in the first year.
Objectives: Brad aimed to generate initial awareness and trial of his product, and far exceeded his targets!
Product: Only a basic product was launched – Pepsi-Cola was initially sold even without bottles. Instead the product was sold through soda fountains located in Brad’s pharmacies.
Price: Initially a simple cost-plus pricing strategy was used. It is likely that Pepsi-Cola started with a skimming strategy, to quickly recuperate start-up costs.
Place: A highly selective distribution is initially recommended, and this is evident with Pepsi-Cola only launching in Brad’s pharmacies.
Advertising: To generate awareness, a celebrity endorsement with race-car driver Barney Oldfield (above) was utilised.
Sales-promotion: Pepsi-Cola was not launched with any promotions. However, if promotions are used at this stage they should aim to encourage consumers to trial the product.
After bankruptcy and then becoming acquired by Loft Inc., Pepsi-Cola’s sales sky-rocketed in the great depression. Consumers were attracted by the value-for-money competitive positioning: 5 cents would buy consumers 12 ounces of Pepsi-Cola, but only 6 ounces of Coca-Cola.
Objectives: During growth, gaining market share is critical. Hence, Pepsi-Cola was marketed aggressively against Coca-Cola to encourage consumers to defect.
Product: As the market becomes increasingly competitive it is important to continually improve the product. Hence, Pepsi-Cola now came in bottles, rather than just soda fountains.
Price: To support the aim of gaining market share, the low price penetration strategy was one of the key reasons why the brand grew massively in this time period.
Place: An extensive distribution network is needed to support rapid sales growth; therefore exclusivity to pharmacies ended and the product became a mainstream consumer good.
Advertising: It is vital to capture the early majority stage, requiring that advertising was designed to effectively reach a mass audience. For example, Radio was selected as a medium because of its low cost-per reach – click here to listen to an ad from the 1930s! During this time, the name was changed to just ‘Pepsi’ to help differentiate the brand from Coca-Cola. Lastly, the 1975 Pepsi Challenge marketing campaign was so effective it almost destroyed the Coca-Cola brand!
Sales-promotion: Due to the overwhelming success of the drink, no sales promotion was used given that the price was already highly competitive and the company struggled to keep-up with demand.
4) Maturity – 1980s – Present day
Since the 1980s Pepsi has been in the maturity stage of the product life cycle, helping the parent company earn almost $20 billion in annual revenue.
Objectives: At this stage products are most profitable, which is why PepsiCo are likely to consider Pepsi as a Cash Cow and aim to make as much profit as possible from the brand.
Product: Now that the product is well established, entire ranges can be introduced that act as extension strategies to prolong the most profitable stage of the product’s life. These include the highly successful Pepsi Max, to the disastrous Pepsi Raw.
Price: PepsiCo and Coca-Cola clearly do not want to enter price-wars, which is a high risk during this very competitive stage. As a result, the price rarely fluctuates away from the market average.
Place: The product now has a global distribution to penetrate emerging economies.
Advertising: The main focus of Pepsi’s advertising during maturity to is to differentiate the brand. This has been mainly achieved through the use of celebrity endorsements – like Beyonce and Michael Jackson – to position the product as a younger and edgier alternative to Coca-Cola
Sales-promotion: To keep consistent with the brand’s value-for-money positioning, Pepsi frequently have both value increasing and value adding offers. An example of the former is offering larger bottle sizes – still to this day – than Coca-Cola; and the latter can be seen in the competitions advertised on Pepsi’s bottles.
5) Decline – sometime in the future
Despite growing consumer interest in healthier lifestyles, sales of Pepsi show no signs of slowing down in the immediate future. Regardless of this, it is recommended that Pepsico have the following strategies ready to be be implemented in the event of the product entering decline.
Objectives: Cost-reduction is key at this stage to help the brand remain profitable despite generating fewer sales.
Product: The range should become rationalized, and may be reduced to just Pepsi to leverage economies of scale and minimize costs.
Price: The price could be reduced further to increase sales among price-sensitive consumers and be an effective advertising cue for this low involvement product.
Place: The product now returns back to selective distribution to focus efforts on just the few remaining outlets that generate profits on Pepsi.
Advertising and Sales Promotion: It can be recommended that PepsiCo could go as far as completely cutting advertising and sales promotion to further reduce overheads.
In summary, the product life cycle of Pepsi is a great business case study that both students and managers can learn from. They key points to remember are that marketing strategies need to be ready for implementation, before the product enters each phase of the life cycle, otherwise opportunities are missed and the brand becomes reactive to change.
© Joshua Blatchford, author of Manifested Marketing, 05/01/2014