Cascades, Diffusion, and Turning Points in the Product Life Cycle

Laurence (Larry) J. Pino, (Esq.)- 1 - Laurence (Larry) J. Pino, (Esq.)- 1 -
Peter N. Golder, Gerald J. Tellis
2004
Growing, Growing,
Gone: Cascades,
Diffusion, and Turning
Points in the Product
Life Cycle

Laurence (Larry) J. Pino, (Esq.)- 2 -
The Authors
Peter N. Golder
Professor of Marketing
Dartmouth University’s Tuck School of Business
PhD, Business Administration (Marketing)
University of Southern California
Gerard J. Tellis
Professor of Marketing, Management and Organization
University of California’s Marshall School of Business
PhD
University of Michigan

Purpose of the Study
The Product Life Cycle (PLC) is vitally important in marketing for three reasons: first,
pressure on managers varies dramatically before and after turning points in the life
cycle; second, the level in growth of sales varies dramatically across stages of the life
cycle; and third, costs and prices decline substantially over the life cycle while
consumer’s sensitivity to price increases over those same stages.
Nonetheless, only two streams of literature address the PLC. One has attempted to
model the pattern of sales during the growth stage relying on a social theory of
adoption and imitation (Bass et al, 1994; Gatignon et al, 1989; Horsky and Simon, 1983; Mahajan
et al, 1990, 2000; Putsis et al, 1997; Talukdar et al, 2002; Ven den Bulte, 2000). The second stream
of literature has addressed the generalizability of the PLC across different industries
(Polli and Cook, 1969; Tellis and Crawford 1981).
These streams of research, comprehensive as they might be, leave a gap in three
ways. First, the PLC lacks clear metrics for the turning points that define the various
stages; second, the PLC lacks a description of economics and market variables during
those stages; and third, the research has not considered the impact of informational
cascades on new product sales.

Purpose of the Study
The purpose of the current Study, therefore, is to address those limitations in the
research by:
 Defining specific metrics for the two key turning points in the PLC: takeoff
and slowdown
 Broadening the theory of the PLC by integrating informational cascades
 Developing a hazard model for the duration of the growth stage which can
be used to predict slowdown early on
 Evaluating hypotheses and present statistics about the PLC

Research Landscape of the Study
The Study addresses the theory of the Product Life Cycle within three overall contexts:
definitionally, through the theory of informational cascades, and through diffusion
theory.
Definitions
The Study utilizes the following definitional nomenclature.
 A product category is defined as “a group of products that are close substitutes and
fulfill a distinct need from the consumer’s viewpoint” (Bass, 1969; Sultan et al, 1990).
 Four stages of a PLC are the following:
 Introduction: The period from a new product’s commercialization until takeoff
 Growth: The period from a new product’s takeoff until its slowdown
 Maturity: The period from a product’s slowdown until sales begin a steady
decline
 Decline: The period of steadily decreasing sales until a product’s demise

Purpose Landscape of the Study
 Product Events are defined as the beginning and end of the first two stages which
are relevant to the history of a new product as follows.
 Commercialization: the point at which a new product category is first sold to
consumers
 Takeoff: the point of transition from the introduction to the growth stage of
the PLC
 Slowdown: the point of transition from the growth stage to the maturity stage
of the PLC

Informational Cascades
An informational cascade describes “how people converge on adopting a behavior with
increasing momentum and declining individual evaluation. . .due to their tendency to
derive information from the behavior of prior adopters” (Bikhchandani et al, 1992, 1998).
Said differently, as people adopt a new product, the very active adoption provides a
signal to non-adopters that it is both appropriate and timely to now adopt that same
behavior. Since early adopters provide additional information to the market, early
adoption is worthwhile to the acceptance of and momentum behind a new product.
However, as individuals adopt prior behavior, each additional decision provides less
individual new information to the market upon which decisions can be made. Hence,
the informational cascade is, on the one side, valuable to new product adoption as well
as the concomitant life cycle, but also self-limited in that the cascade of consumers
adopting a new product is ultimately going to end somewhere at some point. The
question is when.

Diffusion Theory
While informational cascades provide their own dynamic to the adoption, acceptance
and momentum associated with a new products offering, diffusion theory also
provides independent validated data with respect to that same adoption and
momentum. A significant body of research has found that the “rate of adoptions”
follows a normal distribution, with a peak of adoptions at 50% penetration (Mahajan et
al, 1990; Rogers, 1995). However, there is a distinction in the ultimate market penetration
among product categories. Some new products such as televisions and telephones
are adopted by nearly all consumers, while others, such as radar detectors and electric
razors are adopted by particular market segments. To the extent that new product
adoptions follow a normal distribution, high ultimate penetration will be adopted by a
higher percentage of all households at every point in the process; similarly, low
ultimate penetration will be adopted by a lower percentage of all households at every
point. Accordingly, penetration and slowdown should serve as a predictor of a new
product’s ultimate penetration because it reflects the 50% mark of potential adopters.

Data and Methodology
Data
The Study uses the historical method to collect data (Golder, 2000; Golder and Tellis, 1993).
The focus of the study is on consumer durables with information on sales, price,
penetration, and other related variables pulled from Dealerscope Merchandising,
Merchandising Week, Electrical Merchandising, the Electronic Industries Association,
Business Week, Advertising Age, the Statistical Abstracts of the United States, and other
Department of Commerce publications.
Key Events
In light of the definitional rubric identified earlier, the Study identifies three key events in
new product sales: commercialization (the year first sold), takeoff (the first year the
product experienced growth higher than a predetermined number), and slowdown (the
first year in which sales were lower than the previous year.
Key Stages
In addition to the three stages discussed – takeoff, growth and slowdown – there is an
additional stage – maturity – which is divided into two substages – early maturity (begins
the year of sales slowdown and continues until sales grow to the previous local peak) and
late maturity (first year of sales are higher than the local peak and continues until a
product’s sales begin to fall steadily.

Hypotheses
The Study addresses a total of eleven hypotheses. Nine are based on Informational
Cascades and two are based on Diffusion Theory.
Hypotheses Directed Toward Informational Cascades
• H1: Declines in GNP shorten the duration of the growth stage.
• H2: Sales declines at slowdown are proportional to changes in GNP.
• H3: Sales increases at takeoff are proportional to changes in GNP.
• H4: Products with large sales increases at takeoff will have larger sales declines at
slowdown.
• H5: Products with high growth rates during the growth stage will have larger sales
declines at slowdown.
• H6: Leisure-enhancing products have higher growth rates than nonleisure-
enhancing products.

Hypotheses
• H7: Time-saving products have lower growth rates that nontime-savings
products.
• H8: Leisure-enhancing products have a negative effect on the duration of the
growth stage.
• H9: Time-saving products have a positive effect on the duration of the growth
stage.
Hypotheses Directed Toward Diffusion Theory
• H10: Higher penetration at takeoff is associated with higher penetration at
slowdown.
• H11: A product’s penetration at slowdown divided by its ultimate penetration will
be 50%.

Summary of Hypotheses Findings
Hypotheses Finding
H1: Declines in GNP shorten the duration of the growth stage. Supported
H2: Sales declines at slowdown are proportional to changes in
GNP.
Not supported, but does provide some additional
confirmation that change in GNP may serve as a trigger
that begins at informational cascade
H3: Sales increases at takeoff are proportional to changes in
GNP.
Not supported, but does provide some additional
confirmation that change in GNP may serve as a trigger
that begins at informational cascade
H4: Products with large sales increases at takeoff will have
larger sales declines at slowdown.
Supported
H5: Products with high growth rates during the growth stage
will have larger sales declines at slowdown.
Directional, but not significant, support
H6: Leisure-enhancing products have higher growth rates than
nonleisure-enhancing products.
Supported
H7: Time-saving products have lower growth rates that
nontime-savings products.
Supported
H8: Leisure-enhancing products have a negative effect on the
duration of the growth stage.
Supported
H9: Time-saving products have a positive effect on the duration
of the growth stage.
Supported

Summary of Hypotheses Findings
Hypotheses Finding
H10: Higher penetration at takeoff is associated with higher
penetration at slowdown.
Directional, but not significant support
H11: A product’s penetration at slowdown divided by its
ultimate penetration will be 50%.
Supported

Results
The Study provides clear quantifiable results.
 New consumer durables show a distinct takeoff, after which sales increase by
about 45% a year.
 New consumer variables show a distinct slowdown when sales decline by about
15%.
 A hazard model of the duration of the growth stage shows that the probability of
slowdown is positively associated with slower growth in the economy, smaller
price reductions, and higher penetration.
 Slowdown occurs at 34% penetration on average, long before the majority of
households own a new product.
 The growth stage lasts a little over eight years and does not seem to shorten over
time.

Construct For Conceptual Model
The conceptual model for the Study is premised upon the research theory described
above and independent variables associated with the relationship between changes
in GNP, on the one side, and dummy variables identifying time-saving products versus
leisure-enhancing products, on the other. Factoring research theories of
informational cascades and diffusion theory against traditional concepts of states of
PLC, factored by these independent variables, the Study models the PLC based upon a
pathway, unarticulated in the Study, but not unlike what follows.

Conceptual Pathway

Results
 Poor economic conditions can trigger slowdown and good economic
conditions can trigger takeoff.
 Product categories with large sales increases at takeoff tend to have larger
sales declines at slowdown.
 Leisure-enhancing products tend to have higher growth rates and shorter
growth stages than nonleisure-enhancing products.
 Time-saving products tend to have lower growth rates and longer growth
stages than nontime-savings products.

Implications & Conclusions
From an entrepreneurial and managerial point of view, the Study is extremely
relevant and would suggest any number of particularized rules of thumb or
conventions which might well be modified based upon the characteristics of a
particular product. However, from a validated standpoint, the data are compelling.
1. Entrepreneurs and managers tend to believe, optimistically that the PLC will last
forever. The Study suggests otherwise and provides a particular methodology to
establish how long the PLC will run.
2. Managers do have the opportunity to anticipate a slowdown based upon the
intrinsic data associated with sales volume and respond accordingly.
3. Managers do have the opportunity to extend the duration of a growth stage by
modifying prices in relationship to a decline in overall adoption.

Implications & Conclusions
4. The Study’s model can predict slowdown as early as the takeoff stage with a mean
absolute error of 3.4 years.
5. The type of product introduced gives the entrepreneur and/or manager the
opportunity to evaluate its PLC based upon whether it is a leisure-based or time-
saving based product.
6. Similarly, the data also provide the opportunity to evaluate whether the particular
product is intended to satisfy broad-based population needs or wants, or the
desires of a particular market segment, i.e. the total market penetration.
7. The Study provides a rich green screen supporting the use of marketing strategies
specifically directed to early adopters recognizing the leveraged opportunity early
adopters provide for quantum growth and extended momentum.

Additional Considerations
The current Study was published in the Spring 2004 issue of Marketing Science. The
primary categories were consumer durables or, in some redefined terms, consumer
discretionals, based on data sometimes two decades earlier than the publication
date. Nonetheless, the Study, in and of itself, provides extremely valuable insight to
managers for the purpose of identification of PLC and the manager’s control over
decisional points associated with the PLC.
That said, it would be worthwhile to fast-forward that same data for a comparative
study using the Golder, Tellis (2004) Study as a baseline in relationship to its
application to the technology sector which has emerged as the driving force of
economic growth generally, over the past ten years, and exponentially over the past
five years. The objective would be to determine the extent to which the same
product categories and, in addition, product categories emanating from the
technology sector compare to the original data.
The research question of interest would be whether current data might suggest that
in today’s economic environment the results are different than those of the Study
particularly in the technology sector.

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