How Product Longevity Can Shape Company Value

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How long do you expect a product to last when you buy it? The answer probably varies depending on the specific product you’re buying. For example, you might not expect your AA batteries to last as long as your new mattress, and you wouldn’t expect the gallon of milk you just bought to stay fresh longer than your new car will stay running.

Product longevity, or product lifespan, is an important concept in business, and one that can indirectly help you evaluate a company’s true value—as long as you know what you’re looking for.

Why Product Longevity Matters

The longevity of a product can affect a company’s value and future value in three key areas:

  • Commitment to quality. First, you could use the lifespan of the product as a relative gauge of the company’s commitment to quality—and customer service. A company that builds a washing machine that typically quits working after a year probably doesn’t have the rigorous QA and QC standards that a company with a 10-year warranty does. Accordingly, companies whose products last longer tend to perform better with consumers. There’s one strong caveat here; some companies can make up for a short product lifespan, so long as they have the customer service to make things right with customers.
  • Sales. If the short lifespan of a product is justified—such as with older tech products becoming obsolete—it could actually be a positive for the company. If customers are loyal to the brand, they may end up buying more of a company’s product within the same timeframe, resulting in a net sales increase that keeps the company going.
  • Competitive differentiation. Some industries naturally have longer lifespans than others. The tech industry, for example, is notorious for offering consumers shorter and shorter product lifespans. A company in this field that’s able to offer a longer lifespan can differentiate itself from the crowd, and ultimately become the dominant brand in the field, provided customers recognize that distinction.

Variables to Consider

That said, there isn’t a strict one-to-one ratio here. In other words, you can’t expect a company’s value to increase proportionally to how long its products last. Instead, you’ll have to examine the following variables:

  • Repair and replacement parts. How often does the product need to be repaired or replaced? And if so, can it be repaired by switching out a handful of parts, or is the entire product bricked? For example, if a pool or spa stops working, it can usually be fixed with a handful of new parts, but if your iPhone stops working, you’ll probably need to replace it entirely. Look to customer reviews to find out how often customers encounter a malfunctioning or broken product.
  • Price points. You should also consider product longevity as a relative factor correlating with price. If you pay twice as much for a product, you should be able to count on it lasting roughly twice as long. Some companies specialize in low-lifespan products, but they have a price point to match, so customers find equal value in them.
  • New versions of old products. Also look to see how often this company comes out with new versions of its products. If there’s a new, better-definition TV in circulation every 3 years, it won’t matter that their lower-end TVs last less than 100,000 hours. Customers who never see the product through to the end will think it lasts practically forever.
  • Customer expectations. You’ll also need to factor in customer expectations. If customers understand that a product is only meant to last a year, they won’t be disappointed if it lasts a year and a half. If they’re expecting it to last 5 years, but it fails within the same timeframe, they may never buy a product from that brand again.
  • Customer reactions. If you want a full view of the company you’re researching, spend some time sorting through customer reviews. What are people saying about these products? Are they recommending the brand to others, or lamenting the short lifespan?

As with most secondary considerations, product longevity shouldn’t serve as your sole means of evaluating a stock’s value. Instead, it should be one of a cluster of factors that help you pick the companies you invest in. That said, if you’re on the fence about a new company, you may be able to look to their product lifespan and product support to help push you one way or the other.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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