Life Cycle Cost: The Daily Definition
What is a life cycle cost?
Life cycle cost analysis is used to weigh how much spending must be funneled into a product for it to become profitable. With life cycle cost analysis, businesses weigh the cost timeline of a product, from conception to withdrawal. In other words, this method is intended to chart a product’s life span, and to evaluate the costs associated with each phase in that lifespan. Manufacturers will often use this as a tool for budgeting.
There are many steps to creating a life cycle cost. In order to fully understand the process, we’ll walk you through the main phases involved in the life cycle.
The first phase is the development phase, where you establish startup and design costs. From there, the product will move to the introduction phase. This assesses the cost related to informing your customers about this new product.
After this, the product moves to the growth phase. Here, you’ll determine the ins and outs of manufacturing and distributing the product. The product may stay in this phase for some time. However, once a product begins to decrease in profitability, it will enter the decline phase, where manufacturers must decide measures and costs related to phasing the product out or finding a replacement.
Our two cents:
Understanding your products and the extent of their profitability is essential to a good business strategy. By planning a timeline for your products, you can find the ideal courses of action for them. If a certain product has a large manufacturing cost up-front, but will make you more money down the line, that’s important information to know.
You only want to funnel your resources into products that will turn a profit. It’s not an exact science, but better planning can only mean smarter decision making in the long run.