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Assisng Product Line Additions
Managers must identify the situations in which variety is an important competitive variable, examine the relationship between variety and cost, understand the underlying determinants of cannibalization and complementary, and asses the consequences of not responding to competitive innovations.
Conjoint analysis is useful for managers who evaluate new product line components. By allowing managers to identify the mix of attributes that is most likely to achieve market acceptance, these techniques provide good estimates of the probabilities for success of new items.
When a product line expansion is considered, it is important to realize the significant financial investments or incremental recurring costs.
Decision Model
New products are treated as capital budgeting exercises where financial worth is evaluated by calculating the stream of future earnings from the new product.
When a new product represents an addition to a firms product line, two other elements are considered Will the new product be a partial substitute for an existing product (cannibalization) or is this new product complementary to mine to realize cross-elasticities with the other products.
The 5 Key Elements in this model are
1. The sales benefits from offering greater variety through product line extension
. the fixed costs associated with extending the line
. the cannibalization effects
4. the anticipated lost sales from inaction (ie failure to upgrade or extend the line)
5. the positive effects of complimentary
Factors that Influence the 5 key elements
A. Sales Benefits from greater variety
a. Product line expansion should be considered when buyers purchase a mix of substitute products and brands over time; mixed brand purchases mean multiple needs due to differences across segments.
b. Product line extensions may be necessary to reach buyers who do not normally purchase from the product category.
c. Successful early entrants have a major influence on how attributes are vakued by consumers and on their ideal attribute combination
d. Late entrants must succed on differentiation
e. Meaningful variety depends on the differentiabilkity of the product line, differentiability increases with # attributes, range of variation, difficulty in making attribute comparisons.
Firms are motivated to expand the product line when greater variety
1. allows firms to better meet buyers' needs for variety
. more precisely meets the needs of those use substitute categories
. eliminates major gaps in price-performance offerings
4. helps differentiate the firms product from that of the first mover
Fixed costs of Product-Line expansion
Traditionaly it was thought that with more variety less economy of scope and higher inventories.
But economies of scope can come from the joint utilization of inputs (ie raw material, expanding product line permits fuller utilization of a fixed factor of production and through networking arrangements, if an input is not consumed in the production process so it can be reused in a second product and from the sharing of intangible skills, activities or know how.
For consumer goods, the most SIGNIFICANT economy of scope opportunity with respect to product line expansion is the savings and leveraging of brand equity. Increased market share from broader product lines can not only outweigh any increased manufacturing and inventory costs, but may even lead to reduced costs.
The extent to which economies of scope grow relative to econmies of scale, then we anticipate increased product line development activity.
The cannibalization problem
The effects of cannibalization are compounded if the new addition to a line supplants sales from higher margin products (or it could be reverse).
The extent of cannibalization will be greater if
1. The new product offers measurably better performance at a price similar to existing offerings
. The new item carries the same brand name those loyal to a brand are more likely to try a new item carrying that label
. the attributes of new and existing products are highly similar
4. the usage content of new and existing products is similar eg maynoise light mayo
When assortments are expanded for brands that already have high market share, the line extension is hampered by two forces
1. If the new product involves major new quality level or attribute combination, then the brand's equity may not be transferred
. If the new product involves minor variation then the same segment may result in cannibalization
Lost Sales from Inaction
1. New competitive offerings may draw away part of our existing customer base by offering improved or additional benefits
. Opportunity costs for lost sales growth
Defensive strategies
1. Pricing
. Advertising
. Continual product improvement
If new technology is relatively easy to match then a large number of potential entrants reduces the likely prfots from innocation
Just because you have a new product does not mean your customers will not switch.
Opportunity costs for inaction are greater when
1. customer switching costs are low
. new competing products offer benefits that are valued highly by all segments
. competitors posses substantial promotion and distribution resources so they are not easily dislodged from their position
The Development Risks of attempting to meet or pre-empt competition are lower when
Our technological approach is likely to meet with customer acceptance
There is minimal likelihood that our position will be leapfrogged by new technology
Our technology is not easily copied so that it will not be easy for competitors
Complentary relationships in line additions
1. Goods/services that are compliments are those that enhance the customers levels of satisfaction with and the utility of other products
. are compliments because of search economies the time and efforts savings of purchasing together
. that enhance the overall image of the seller so that products are valued more highly. .
The immediate complimentary effect is likely to be greatest in the case where the new product enhances the desirability of a specific existing complimentary product to non-buyers. (addition of sensor from electric people will use foamy cream now)
IMPLICATIONS for PRODUCT LINE STRATEGY
Assortment additions cherry coke
Derivative Models new models for slightly different functional needs
Classic improvements greater quality offered
Quality level expansions Lexus
Major reformulations Stainmaster carpets
New SubCategories major innovations that create new usage opportunities
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