plus the effects of a late mature market.
there is an important concept in marketing that provides companies with tremendous insight as to what they can expect for their products or services in the marketplace. it’s called the product life cycle and, sooner or later, all products and services will go through the complete cycle. as they do, several external and internal factors change. the accounting industry and the services it provides are no different.
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as this figure shows, the product life cycle is divided into four distinct phrases: introduction, growth, maturity and decline. the most important thing to remember about the product life cycle is that it is intimately tied into the sales of that product or service. it’s important that a firm’s marketing mix change during the life cycle of its various products.
firms that recognize which stage their different services are in are better off in identifying forthcoming opportunities as well as threats. for example, the marketing mix of attest and tax services – which are in a mature to decline phase – need to be much different than that for fraud accounting, cloud accounting or some other recently introduced consulting service.
introduction phase
in the introduction stage, sales are normally low because the marketplace is still unaware of the service. your marketing emphasis should be on informing prospective clients of the benefits and value of the service. a lot of money will need to be invested in promotion with the hope of future profits. you are basically building capacity for the future and you need to stick with your strategy during this phase.
often during the introduction stage, companies take one of two approaches. they either roll out the product or service using a skimming strategy or they use a marketing penetration pricing strategy in order to obtain the largest market share. the latter strategy makes sense if the market is large and buyers are very price-sensitive.
growth phase
once past the introductory stage, a successful service or product enters stage two, which is the growth phase. if your service or product reaches the growth phase there is a rapid climb in sales. profits as well as sales increase. the number of competitors also rises in this phase. usually, the first one in the marketplace reaps the largest rewards, but it is not uncommon for others to copy those who are successful.
a number of firms fail to see the impact of competition on future sales and profits in this cycle. the new competitors often bring enhancements to the original product or service, thus creating new opportunities and expanding the market even further. because demand for the product or service is increasing in this stage, prices usually stay where they were in the introduction phase or fall slightly. profits, however, rise significantly. usually, toward the end of this phase, a company may lower its prices in order to attract a new group of buyers.
maturity phase
in a mature market, there are many competitors, and sales and profits begin to level off. many producers will cut prices in their attempt to capture a larger market share. in contrast to the introduction phase where a firm can ask for a premium price because there is little, if any, competition, the mature stage is characterized by a lot of price dealing and cutting. in the mature stage, you will find new services replacing older ones and some services completely disappearing. change is the one constant in the product life cycle.
the accounting profession as we know it today is undergoing accelerated, if not exponential, change. the profession has changed more in the last 20 years than in all the preceding years of its history. equally important, the mainstay of the accounting profession – attest function work – is in the last stage of the product life cycle. with analytics and data mining talking a larger role in large audits, will large engagement teams still exist in the future?
as a result, revenues from traditional services continue to shrink year after year, while revenue from other services that are in an introduction or growth stage continue to increase. the identifiable effects of a late mature market are the same for any kind of service or goods, and will be discussed below.
consolidation. in this stage there is normally a consolidation of providers. we have already witnessed the big 6 go to the big 4 and many top 100 firms completely disappear over the last 15 years. there is a healthy environment for mergers of firms of all sizes. a week does not go by without the announcement of another merger. mergers of accounting firms are likely to continue for some time into the future.
brand name recognition. the big 4 four firms have already achieved brand name recognition, at least among the fortune 500 firms. several national and regional firms, such as bdo, grant thornton, rms and plante moran, have also created more brand awareness as they continue to gain a greater geographic footprint through their acquisitions. other firms are developing name recognition through international associations and networks.
several accounting and tax franchises already exist and continue to develop brand recognition.
who hasn’t heard of h&r block? the power of brand recognition becomes a critical marketing factor in this stage of the product life cycle.
price competition. price competition among the largest accounting firms started in the late 1970s and early 1980s, and probably contributed to the big eight turning into the big six and then into the big four. price competition started with discounting high-end audits and today permeates all types of compliance services. with the massive number of mergers and the increase of sole practitioners and two- to three- partner firms, price competition is now a daily fact of life, no longer restricted to audits of major publicly held companies. technology and a sophisticated client base have also added to price competition.
increased involvement in marketing. because of increased competition, firms that operate in a mature market need to spend more time and money on marketing and business development. whereas 10 to 20 years ago accounting firms spent very little on marketing, today it is not unusual for firms to spend from 2 percent to 8 percent of their net fees on marketing. most firms with revenues of more than $5 million have a full-time marketing professional or two.
competition from outside the profession. there are new service providers today. accounting firms only offer one unique service to their clients – the attest service. all other services that accounting firms provide today can be obtained from other sources: lawyers, systems consultants, financial planners, employee benefits consultants and management consultants. many other financial and legal service providers have seen additional pressure from overseas competitors. will the accounting profession be far behind?
sophisticated buyers. in today’s marketplace, clients are selecting accountants on the basis of the impact that the accountant may have on their business or personal life. it is not unusual for clients to work with more than one accounting firm for different types of services. more and more clients are asking for proposals, some even on a yearly basis.
the pressures that the accounting profession is experiencing today will only increase in the future. in the mature marketplace, clients will have a broader choice and it will become more difficult for firms to differentiate themselves on the basis of price, range of services, and niche expertise. differentiation based on perception and brand recognition will become more important. but the firms that will truly be successful are the ones that concentrate on the impact their services have on the clients’ operations.
clients will continue to look at attest and tax compliance portions of accounting practices as commodity services with the lowest bidder often the winner.
decline phase
the last phase in the product life cycle is decline. this a period when sales show a strong downward movement and profits are slim. the typical pricing strategy that firms employ in this stage is price cutting.
it appears that the product life cycle is accelerating for many products today. perhaps the main reason for this is the rapid advancement in technology. all you need to think about is the product life cycle of records and tapes – 78 rpm, then 33 rpm records, eight-track tapes, cassette tapes, cds, dvds and streaming music. or think of the iphone, which is now up to the iphone 14.
the other major element that causes decline is a shift in customer needs, attitudes and behavior. the accounting profession has not yet reached the end stages of the decline phase, but it would be foolhardy to think that it never will, especially if the profession fails to continue to reinvent itself.
all firms, small and large, need to begin the process of thinking about the future in order to develop a well-thought-out plan for handling this potential danger. many of the top 100 firms are currently doing so by developing new services, acquiring various consulting firms and even looking for new uses for traditional services.