Life Cycle Costing

1. Product Life Cycle
- Raghunandan Helwade

2. Individual Product Strategies
• Product Life Cycle (PLC):
• Describes the advancement of products through identifiable stages of their existence.
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline Stage
Total
Market
Sales
Time

3. The product life cycle
Development Introduction Growth Maturity Saturation Decline
Hodder & Stoughton © 2017

4. The Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline Stage
Total
Market
Sales
Time

5. The Product Life Cycle Concept is Based on Four
Premises
Products have a
limited life.
Product sales pass through
distinct stages, each with
different marketing
implications.
Profits from a product
vary at different stages
in the life cycle.
Products require different
strategies at different
life cycle stages.

6. PLC Stages and Characteristics

7. PLC Length and Shape
Sales Sales Sales
Time
Time Time
Style Fashion Fad

8. PLC Marketing Strategies
Stage Objective Marketing Strategy
Introduction Awareness & trial Communicate benefits
Growth Usage of firm’s brand Specific brand communication,
lower prices, expand distribution
Maturity Maintain market share Sales promotion, drop price,
Extend life cycle expand distribution, new uses
& new versions of product
Decline Decide what to do Maintain, harvest, or divest
with product

9. Limitations of the PLC
1. The life cycle concept applies best to product forms rather than to
classes of products or specific brands.
2. The life cycle concept may lead marketers to think that a product has a
predetermined life, which may produce problems in interpreting sales
and profits.
3. It is only a descriptive way of looking at the behavior of a product and
the life cycle can not predict the behavior of a product.

10. Product-Line Strategies
• Strategic Alternatives:
1. To increase the length of a product line.
2. To decrease the length of a product line.

11. Increasing the Product Line
• Downward-stretch Strategy
• Upward-stretch Strategy
• Two-way-stretch Strategy
• Line-filling Strategy
Cannibalization occurs when a new
Product takes sales away from
existing products.

12. Decreasing the Product Line
• Product Line Contraction:
• Firms must consider deleting products when:
• They are not successful.
• They reach the decline stage of PLC.
• Long product line marketing costs are too high.

13. The Diffusion Process
Innovators
(2.5%)
Early Adopters
(13.5%)
Early Majority
(34%)
Late Majority
(34%)
Laggards
(16%)
Laggards
Late
Majority
Early
Majority
Early Adopters
Innovators
"The Chasm"
Technology Adoption Process

14. The Diffusion Process
Laggards
Late
Majority
Early
Majority
Early Adopters
Innovators
"The Chasm"
Technology Adoption Process

15. Life Cycle costing

17. Introduction
• What is Life Cycle Costing?
• Life Cycle Costing is a method that aggregates all costs that an organization or individual will incur
over the life span of the asset, project, investment, etc. It includes the initial investment (non-recurring
expense) and any further investment such as operating cost, maintenance, repair, and upgrades
(recurring expense).
• Life cycle costing is also known as whole life costing. Its primary purpose is to help
management decide whether or not to go ahead with a project or acquire an asset.
Management usually analyses the cost of ownership and operating cost and then
eventually chooses the asset with the minimum overall cost..

19. • Initial Cost: It is either the purchase price of an item or the initial cost of the set-up
in case of a project. In most cases, it also includes the cost of installation.
• Recurring Cost: It represents all those costs that take place after the purchase, which
primarily include operating expense and maintenance expenses.
• Operating Cost: These costs are associated with the usage of the asset.
• Maintenance Expense: These costs are associated with repair and replacement expenses.
• Disposal Cost: These costs are incurred at the time of asset disposal.
• Residual Value: It represents the asset’s value at the end of its useful life. The higher
the residual value, the lower the asset’s whole life cost.

20. What is life cycle costing?
• Life cycle costing, or whole-life costing, is the process of estimating how much money you will spend on an
asset over the course of its useful life. Whole-life costing covers an asset’s costs from the time you purchase
it to the time you get rid of it.
• Buying an asset is a cost commitment that extends beyond its price tag. For example, think of a car. The
car’s price tag is only part of the car’s overall life cycle cost. You also need to consider expenses for car
insurance, interest, gas, oil changes, and any other necessary maintenance to keep the car running. Not
planning for these additional costs can set you back.
• The cost to buy, use, and maintain a business asset adds up. Whether you’re purchasing a car, a copier, a
computer, or inventory, you should consider and budget for the asset’s future costs.

21. Life cycle costing process
• Conducting a life cycle cost assessment helps you better predict how much your
business will pay when you acquire a new asset.
• To calculate an asset’s life cycle cost, estimate the following expenses:
• Purchase
• Installation
• Operating
• Maintenance
• Financing (e.g., interest)
• Depreciation
• Disposal
• Add up the expenses for each stage of the life cycle to find your total.

22. Formula
• We can derive the value of whole life costing by identifying all the cost heads
and their corresponding period of occurrence, then discounting them to the
present value, and then adding them up while deducting the present value of the
residual value. Mathematically, it can be represented as,
• Life Cycle Costing Formula = Initial Cost + PV of All Recurring Costs –
PV of Residual Value

23. • Life cycle costing assessment example
• Let’s say you want to buy a new copier for your business.
• Purchase: The purchase price is $2,500.
• Installation: You spend an additional $75 for setup and delivery.
• Operating: You need to buy ink cartridges and paper for it, so you estimate you will spend $1,000 on these supplies over the course of its
useful life. And, you expect the total electricity the copier will use to be $300.
• Maintenance: If the copier breaks, you estimate repairs will total $450.
• Financing: You purchase the copier with your store credit card, which has an interest rate of 3.5% per month. You pay off the printer the
next month, meaning you owe $87.50 in interest ($2,500 X 3.5%).
• Depreciation: You predict the copier will lose value by $150 each year.
• Disposal: You estimate it will cost $100 to hire an independent contractor to remove the copier from your business.
• Although the purchase price of the copier is $2,500, the life cycle cost of the copier could end up costing your business over $4,500.

24. • Let us take the example of John, who wants to purchase a new car worth $12,000. Calculate the
car’s life cycle cost if John plans to sell the car after five years at a residual value of $3,000. As per
estimates, the annual expense for maintenance & repair will be $1,000, and gas consumption per
year will be another $3,500. Please consider the applicable interest rate to be 8%.
• Given,
• Initial cost = $12,000
• Recurring cost = Maintenance & repair + Gas consumption
• = $1,000 + $3,500
• = $4,500
• Residual value = $3,000
• No. of years = 5
• Interest rate = 8%

26. • = $12,000 + $4,500 * [1 – (1 +
8%)-5] / 8% – $3,000 / (1 + 8%)5
• = $27,925

27. Applications of Life Cycle Costing
• In capital budgeting, the life cycle costing is a critical component of the decision-
making process (purchase of asset) as it is used to estimate the net cash flows and the
expected return on investment (ROI).
• In the case of procurement, the department uses it to determine which is the least
expensive item and accordingly place the orders.
• In engineering and production, this concept is used in developing and manufacturing
goods that incur the least cost to the customer in terms of installation, operating,
maintenance, disposal, etc.
• In the case of customer service, whole life costing is used to minimize the amount of
replacement, warranty, and field service.

28. Purpose of the life cycle cost analysis
• As mentioned, conducting a life cycle cost analysis helps you estimate how much an asset will cost you over the course of
its life.
• Take a look at some of the reasons why knowing an asset’s total cost can guide your business decisions.
• 1. Choose between two or more assets
• Life cycle cost management depends on your ability to make a smart investment. When you are deciding between two or
more assets, consider their overall costs, not just the price tag in front of you
• 2. Determine the asset’s benefits
• By using life cycle costing, you can more accurately predict if the asset’s return on investment (ROI) is worth the expense.
If you only look at the asset’s current purchase cost and don’t factor in future costs, you will overestimate the ROI.
• 3. Create accurate budgets
• When you know how much an asset’s total price is, you can create budgets that represent your business’s actual expenses.
That way, you won’t underestimate your business’s costs.
• A budget is made up of expenses, revenue, and profits. If you underestimate an asset’s cost on your budget, you are
overestimating your profits. Failing to account for expenses can result in overspending and negative cash flow.

29. Benefits
• It provides a precise estimate of the expected cost to be incurred over the
asset’s life span.
• It makes sure that the best decision is made based on an accurate and
realistic estimate of costs.
• It ensures that the management takes early actions to lower recurring and
non-recurring costs.

30. Life Cycle Cost Analysis
• Life cycle cost analysis (LCCA) is an approach used to assess the total cost of owning a facility
or running a project. LCCA considers all the costs associated with obtaining, owning, and
disposing of an investment.
• Life cycle cost analysis is especially useful where a project comes with multiple alternatives and
all of them meet performance necessities, but they differ with regards to the initial, as well as the
operating, cost. In this case, the alternatives are compared to find one that can maximize savings.
• For example, LCCA helps to determine which of the two alternatives will raise the initial cost
but will reduce the operating cost. However, LCCA should not be used for the purpose of
budget allocation.

32. Understanding Life Cycle Cost Analysis
• Life cycle cost analysis is ideal for estimating the overall cost of a project’s alternatives.
It is also used to choose the right design to ensure that the chosen alternative will offer
a lower overall ownership cost that is consistent with function and quality.
• LCCA needs to be performed during the initial stages of the design process, as there is
room to make changes and refinements that will ensure that the life cycle cost is
reduced. The first step when performing an LCCA is determining the economic impact
of the alternatives available. The effects are then quantified and expressed in monetary
terms.

34. Life Cycle Cost Analysis for Infrastructure
• Life cycle cost analysis can be used to assess different infrastructural sectors such as rail and urban
transport, airports, highways, and ITS, as well as ports and industrial infrastructure. Such kinds of
projects make use of capital expenditure, which is the initial cost involved when constructing or
delivering an infrastructural asset. Simply put, it is the cost of construction for the infrastructure
of choice.
• The other thing that is important in infrastructural development is operating expense, which
consists of a number of costs, including utility, manpower, insurance, equipment, health, and
routine and planned repairs.
• Replacement costs are incurred every cycle based on the predefined age of replacement for
different assets and the manufacturer’s preference.
• Probably another important element of LCCA is disposal cost. When the disposal cost is
incorporated, it is possible to offset any additional cost incurred during a particular year.

36. THANK YOU