When Should You Phase Out a Product or Service?

November 6, 2022

Business owners must be adaptable and creative to keep up with consumer trends, changes in business, and the demands of the economy. Sometimes, that means discontinuing a product, service, or market offering. But it may not always be easy to decide when to cut a product offering. Today, we’ll measure things like consumer demand, cost vs value, and manufacturing & opportunity costs to determine when you should phase out a product in your business.

Follow Along With The Financially Simple Podcast!

Understanding the product life cycle and its four phases
Signs that a product has reached its growth and maturity phases
Different factors that impact the different phases of a product’s life cycle
Tracking the profitability of a product or service
How focusing on one product too much can harm your product mix and your business
Looking at employee costs and the cost of production
A quick and dirty math tip for business owners
How highly engaged and motivated employees can increase your profit margins
How to make cross-selling opportunities work
Considering your product array and the power of cross-selling
How products can “cannibalize” others in your product array
How to effectively communicate product or service discontinuation to your customers or clients

The Life Cycle of a Product

Many times, when I’m thinking about business, I can’t help but be reminded of that old song Turn! Turn! Turn! by The Byrds. There truly is a season for everything. Although it changes depending on the industry, product type, and various market conditions, each product has its own season. We call it the product life cycle. But what does that really mean?

Well, according to Investopedia, the life cycle of a product is “the length of time a product is introduced to consumers into the market until it’s removed from the shelves.” So, just as each of us has a life cycle where we are born, develop, mature, and pass away, the same is true of the products we know and love. One day (perhaps long after I’m gone), the products I’ve used for my entire life will cease to exist.

This can be a difficult experience for a business owner. I mean, think about your own children (if you have them). You’ve watched them grow from an infant that could do nothing on its own, to a toddler, and on up into adolescence. With each new stage of their lives, they become more independent, requiring less and less of your hands-on instruction and attention. Then one day, she’s driving your truck and bringing a boy home to meet you. At least, that’s what I’m going through right now. I appreciate any prayers on my behalf! But the same is true of some of the offerings in your business. You were there for each stage of their life cycle. You probably have some emotional investment in these offerings. So, what does the product life cycle look like?

The Introduction Stage

This is typically the infancy of your product. At this point, you’ve birthed an idea. Research and development have been completed (at least enough to go to market) and you’re working out how to market this new and exciting offering. During this stage, sales tend to be slow as demand is created. Nonetheless, you’re excited to unveil something new and previously unseen to the world. But the introduction stage is just that… a stage. You can’t stay here.

The Growth Stage

At this point, you should see a growing demand, promoting an increase in production. Competitors may enter the market with their own versions of your product. They’ll produce either direct copies or will have engineered some improvements. Because of this, branding becomes an important tool in maintaining your position in the marketplace. I always think back to Apple releasing the first iPhone, and then Android emerged as their top competitor. Not only did Android expand on the iPhone, but they also did it better! That’s just my opinion. Feel free to make it your own.

The Maturity Stage

Once you’ve reached this stage, your product is well established in the marketplace, and production costs should have decreased. However, this is also true for your competitors and, at this point, many of your consumers have already purchased some version of the product. That’s why, things like branding, pricing, and product differentiation become even more vital during the maturity stage.

The Decline Stage

Eventually, the market becomes so saturated with competitors that the product begins its decline. The abundance of options for consumers leads to lower prices and thus, lower profits for manufacturers. However, the decline stage can also be brought on by newer, more innovative products that make the previous one obsolete. This can happen because of a competitor or it could come about internally. Using my Apple illustration once again, think about the first iPhone. Apple has continued to build upon that initial product offering, improving the technologies that went into the original while also adding new ones with each new release.

Once again, the life cycle of a product is dependent on many things such as industry, product type, and a variety of market factors. For example, Coca-Cola has been around since 1892 and continues to be a thriving product. On the other hand, the phone booth (a common fixture up through the early 90s) is virtually non-existent today.

How Do You Know When It’s Time to Phase Out a Product In Your Business?

As entrepreneurs, we have an unbelievable propensity for optimism. However, this can be a detriment when it’s time to phase out a product that has reached the end of its life cycle. Oftentimes, business owners will cling to a product that isn’t making money out of some misguided sentimentality or in the hope that it will come back in fashion. But, there are several factors to consider when decommissioning a product.

Total Costs

Rather than focusing on the per-unit cost of an offering, you should be looking at fixed manufacturing costs, selling costs, transportation and storage costs, customer service costs, and any other cost you can tie to the product. Without considering the total cost, you’re making a decision based on part of the data. In doing so, you could end up cutting an offering that only appears to have reached its decline. This is easily tracked if your accounting or bookkeeping services use proper cost segregation techniques.

Opportunity Costs

This may seem out of place, but the time and resources spent to keep an offering could be used to research and develop the next big product offering. Consider technological advancements and the trends consumers are following. Will your business be left behind if you remain focused on maintaining your current offerings rather than developing new ones that fill the needs of consumers moving forward? Therefore, it’s important to consider your opportunity costs when considering a phase-out plan.

The Employee Costs

In some instances, discontinuing a market offering could mean laying off team members who were assigned to that particular offering. This could have a ripple effect, causing the remaining team members to become less confident in the security of their positions. A decline in employee morale creates far more problems than simply having an unhappy team.

A study published in International Business Research found that low staff morale and low motivation can negatively affect competitiveness and productivity. Supporting this information is a study by Gallup. In it, they found that highly engaged employees (those with high morale) realize a 41% reduction in absenteeism and a 17% increase in productivity. When weighing the pros and cons of phasing out a product, you really must consider how it will affect your team.

Cross-Selling Opportunities

Once again, merely looking at your sales metrics and determining that the offering in question isn’t a top-seller, isn’t enough. This could be a misleading piece of data if you aren’t exploring it within the proper context. Therefore, you must also examine how the product or service drives the sale of other offerings. For example, you might find that consumers who purchase one type of offering often purchase accessories and upgrades to pair with the primary offering.

To explore your cross-selling opportunities, you must first track your sales and marketing performance to determine exactly how much the product in question drives other sales. Then, measure the cost and profitability of the connected items, deciding if the product is truly a loss leader or a gateway product.

Cannibalization

Finally, you must consider if cannibalization is at play. Now, I’m not talking about being tossed into a boiling cauldron by some remote jungle tribe. Instead, the cannibalization I’m referring to is when one product offering underperforms because of another. A great example of this is when a company offers a lite version of their product. This is common in the app industry. A company will provide a free version of its product that allows users to access most of its features. Consumers must pay a premium to enjoy the fully unlocked version. By giving most of the app away for free, they could be missing out on sales for the full version.

To test this, you could survey your consumers to see why they’ve chosen one offering over another. Then you could temporarily remove one of the offerings as part of a larger phase-out plan to see if sales numbers change.

How to Communicate the Phase Out Process

If possible, the way you communicate decommissioning a product should encourage the consumer to find a suitable replacement from your remaining offerings. You want them to remain engaged with your company rather than a competitor. But what should you include in your announcement?

Tell the consumer why you’re planning to phase out a product.
Create a list of the products being discontinued and others that could be affected.
Supply information about the date of the customer’s last order.
Give the consumer last-buy purchase conditions and reasonable service expectations.
Provide a list of available substitutes, if applicable.

The way you communicate the change can make or break how it is perceived. But it isn’t a guarantee that you won’t face backlash. For example, in 2020, Taco Bell made the decision to discontinue Mexican Pizza from its menu. Part of their reason for doing this was that it would save 7 million pounds of paperboard each year. However, fans of the menu item were outraged. They received 170,000 signatures on a Change.org petition to save the fast food favorite.

Wrapping Up…

It may very well be necessary to phase out a product. It could be the correct strategic move. However, you must be certain that you’re seeing things clearly before making a decision that could have some big consequences for your business. More than likely, someone is going to be unhappy with the decision. That’s okay. But you don’t want to upset your consumers unnecessarily.

Friends, life is hard. We’re still dealing with things that many of us have never had to deal with before. But life is still good. I know that making the decision to discontinue a market offering in your business is frustrating. But, with an effective review of each of your metrics, you can at least make it financially simple. Let’s go out and make it a great day!

Are you considering whether to phase out a product in your business? Do you want to be certain you’re making the right call? Reach out to our team! Our business advisors are always ready to help.

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