Product Line Decisions

UNIT 4 PRODUCT LINE DECISIONS

Objectives

After reading this unit you should be able to :

• explain the concept and logic behind product line
• discuss reasons for the proliferation of product lines
• enumerate the demerits of product line extensions
• describe the main factors influencing the decision process for product line
• analyse the changes in product lines of different companies
Structure
4.1 Introduction
4.2 Evaluation of Product Line
4.3 Product Line Extension - The Main Reasons
4.4 The Disadvantages of Line Extension
4.5 Factors Influencing Product Line Decisions
4.6 Category Factors Influencing Product Line Decisions
4.7 Summary
4.8 Self-Assessment Questions
4.9 Further Readings

4.1 INTRODUCTION
In the last 'few years products have proliferated at an unprecedented rate in every
category of consumer goods and services. There has been widespread line extensions
of all types of consumer goods and services. This puts the focus of all the marketing
executives on the product line, the length and breadth of consumers it is catering to
and the future direction to be taken.

A group of products within a product class that are closely related because they
perform a similar function, satisfy the same basic want, are sold to the same customer
groups, are marketed through the same distribution channels, or fall within given
price ranges, or share some other common characteristic. Example: Detergents, `nail
polishes, soaps, life insurance etc. For example the product line of a detergent
manufacturer will consist of all the different types of detergents he has to offer: the
product line of Hindustan lever Ltd. consists of all its detergents including those in
premium segment and as well as non premium segment catering to. the mass market..

4.2 EVALUATION OF PRODUCT-LINE

Each product line consists of product items, which should be evaluated. The product-
line manager should study the sales and profit contributions of each item in the
product line as well as the way the items are positioned against competitor's items.
Then the competitors analysis in the relevant product categories is also required to be
done. This provides information needed for making several product-line decisions.

One major issue faced by product-line managers is that of optimal length of the
product line. A product line is perceived to be efficient if no- extra profit can be
garnered by either addition of one more item or deletion of one item from the product
line.

Line stretching involves the question of whether a particular line should be extended
downwards, upward, or both ways. Line filling raises the question of whether additional 5
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items should be added within the present range of the line. Line filling should not
lead to cannibalization of the existing products. Line modernization raises the
question of whether the line needs a new look and whether the new look should be
installed piecemeal or all at once. Line featuring raises the question of which items to
feature in promoting the line. Which item has to be put in the forefront of promotion
to attract customers to that particular category. Line pruning raises the question of
how to detect and remove weaker product items from the line. It is aimed at getting
rid of the dead wood and making the product line more efficient..
Activity 1
Enlist the product line of detergents of top three detergent manufacturers in India and
analyse the length and breadth of consumer segments they cater to.
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4.3 BASES FOR PRODUCT LINE EXTENSION

The following seven important factors make companies pursue line extensions as a
significant element of their marketing strategies.
Customer Segmentation
Line extension is perceived by managers as a low-cost, low-risk way to meet the
needs of various customer segments, and by using more sophisticated and lower-cost
market research and direct-marketing techniques, they can identify and target finer
segments more effectively than ever before. In addition, the depth of audience-profile
information for television, radio, and print media has improved; managers can now
translate complex segmentation schemes into efficient advertising plans.
Consumer Desires
There is widespread volatility in the consumer behaviour and brand loyalty has taken
more or less a back seat in many different categories of consumer goods and services.
More consumers than ever are switching, brands and trying products they've never
used before. Line extensions try to satisfy the desire for "something different" by
providing a wide variety of goods under a single brand umbrella. Such extensions,
companies hope, would fulfill customers' desires while keeping them loyal to the
brand franchise.
Moreover, according to studies conducted by the Point-of-Purchase Advertising
Institute,USA, consumers now make around two-thirds of. their purchase decisions
about grocery and health and beauty products on impulse while they are in the store.
Line extensions, if stocked by the retailer, can help a brand increase its share of shelf
spaces thus attracting consumer attention. When marketers coordinate the packaging
and labeling across all items in a brand line, they can achieve an attention-getting
billboard effect on the store shelf or display stand and thus leverage the brand's
equity.
Pricing Breadth
Managers have found a novel way of increasing profitability through line extension.
Managers often tout the superior quality of extensions and set higher prices for these
offerings than for core items. In markets subject to slow volume growth, marketers
can then increase unit profitability by trading current customers up to these
"premium" products. In this way, even cannibalized sales are profitable - at least in
the short run.
In a similar spirit, some line extensions are priced lower than the lead product. For
example, American Express offers the Optima card for a lower annual fee than its
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 Product Line Decisions
standard card, and Marriotte introduced the hotel chain Courtyard by Marriotte to
provide a lower-priced alternative to its standard hotels. Extensions give marketers
the opportunity to offer a broader range of price points in-order to capture a wide
audience.
Excess Capacity
Line extension helps in utilizing the excess capacity of the production facilities of the
firm. In the 1980s, many manufacturing operations added faster production lines to
improve efficiency and quality. The same organizations, however, did not necessarily
retire existing production lines. The resulting excess capacity encourages the
introduction of line extensions that require only minor adaptations of current
products.
Short-Term Gain
Besides sales promotions, line extensions represent the most effective and least
imaginative way to increase sales quickly and inexpensively. The development time
and costs of line extensions are far more predictable than they are for new brands,
and less cross-functional integration is required.
In fact, few brand managers are willing to invest the time or assume the. career risk to
introduce new brands to market. They are well aware of the following: major brands
have staying power (almost all of the 20 brands that lead in consumer awareness
were on that list 20 years ago); the cost of a successful new launch is now estimated
at $30 million, versus $5 million for a line extension; new branded products have a
poor success rate (only one in five commercialized new products lasts longer than
one year on the market); and consumer goods technologies have matured and are
widely accessible. Line extensions offer quick rewards with minimal risk.
Senior executives often set objectives for the percentages of future sales to come
from products recently introduced. At the same time, under pressure from stock
exchanges for quarterly earnings increases, they do not invest enough in the long-
term research and development needed to create genuinely new products. Such
actions necessarily encourage line extensions.
Competitive Intensity
Mindful of the link between market share and profitability, managers often see
extensions as a short-term competitive device that increases a brand's control over
limited retail shelf space and, its overall demand for the category for new branded or
private-label competitors and to drain the limited resources of third and fourth place
brands. Close-up and Colgate toothpastes, for example, both available in more than
15 types and package sizes, have increased their market shares in the last decade at
the expense of smaller brands that have not been able to keep pace with their new
offerings.
Trade Pressure
The proliferation of different retail channels for consumer products, from club stores
to hypermarkets, pressures manufacturers to offer broad and varied product lines.
While retailers object to the proliferation of marginally differentiated and "me-too"
line extensions, trade accounts themselves contribute to stock-keeping unit (SKU)
proliferation by demanding either special package sizes to fit their particular
marketing strategies (for example, bulk packages or multipacks for low-price club
stores) or customized, derivative models that impede comparison shopping by
consumers. Black & Decker, for example, offers 19 types of irons, in part to enable
competing retailers to stock different items from the line.
4.4 THE DISADVANTAGES OF LINE EXTENSION
Given this backdrop, it's easy to visualise why so many managers have been swept
into line-extension mania. But, as more managefs are discovering, the problems and
risks associated with extension proliferation are formidable.
Weaker Line Logic
Manager often, extend a line without removing any existing items. As a result, the line
may expand, to the point of over segmentation, and the strategic role of each item becomes 7
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muddled. Salespeople should be able to explain the commercial logic for each item. If
they cannot, retailers turn to their own data - the information collected by checkout
scanners - to help them decide which items to stock. Invariably, fewer retailers stock
an. entire line. As a result, manufacturers lose control of the presentation of their lines
at the point of sale, and the chance that a consumer's preferred size or flavor will be out
of stock increases.
A disorganized product line can also confuse consumers, motivating those less interested
in the category to seek out a simple, all-purpose product, such as All Temperature Cheer
in the Laundry detergent category.
Lower Brand Loyalty
Some marketers mistakenly believe that loyalty is an attitude instead of understanding
that loyalty is the behaviour of purchasing the same product repeatedly. In the past 50
years, many of the oldest and strongest brands have had two and three generations of
customers buying and using products in the same way. When a company extends its
line, it risks disrupting the patterns and habits that underlie brand loyalty and reopening
the entire purchase decision.
Although line extensions can help a single brand satisfy a consumer's diverse needs,
they can also motivate customers to seek variety and. hence, indirectly encourage
brand switching. In the short run, line extensions may increase the market share of
the overall brand franchise. But if cannibalization and a shift in marketing support
decrease the share held by the lead product, the long-term health of the franchise will
be weakened. This is particularly true when line extensions diffuse rather than
reinforce a brand's image in the eyes of long-standing consumers without attracting
new customers.
Underexploited Idea
By bringing important new products to market as line extensions, many companies
leave money on the table. Some product ideas are big enough to warrant a new brand.
The line extensions serves the career goals of a manager on an existing brand better
than a new brand does, but long-term profits are often sacrificed in favour of short-
term risk management.
Stagnant Category Demand
Line extensions rarely expand total category demand People do not eat or drink more,
wash their hair more, or brush their teeth more frequently simply because they have
more products from. which to choose. In fact, a review of several product categories
show no positive correlation between category growth and line extensions. If
anything, there is an inverse correlation as marketers try in vain to reinvigorate
declining categories and protect their shelf space through insignificant line
extensions.
Poorer Trade Relations
On average, the number of consumer-packaged-goods SKUs grew 16% each year
from 1985 to 1992, in' USA, while retail shelf space expanded by only 1.5% each
year. Retailers cannot provide more shelf space to a category simply because there
are more products within it. They have responded to the flood by rationing their shelf
space, stocking slow-moving items only when promoted by their manufacturers, and
charging manufacturers slotting fees to obtain shelf space for new items and failure
fees for items that do not meet target sales within two or three months. As a
manufacturer's credibility has declined, retailers have allocated more shelf space to
their own private label products. , Competition among manufacturers for the limited
slots still available escalates overall promotion expenditures and shifts margin to the
increasingly powerful retailers.
More Competitor Opportunities
Share gains from line extensions are typically short-lived. New products can be matched
quickly by competitors. What's more, line-extension proliferation reduced the retailer's
average turnover rate and profit per SKU. This can expose market leaders to brands that
do not attempt to match all the leaders' line extensions but instead offer product lines
concentrated on the most popular line extensions. As a result, on a per - SKU basis,
'lesser known brands, as compared to market leaders, can deliver a higher direct product
profit to the retailer than brands with -larger shares and more SKUs.
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 Product Line Decisions
Increased Costs

Companies expect and plan for a number of costs associated with a line extension,
such as market research, product and packaging development, and the product
launch. The brand group may also expect certain increases in administrative costs;
planning the promotion calendar takes more time when an extension is added to the
line, as does deciding, on the advertising allocations between the core brand and its
extensions. But managers may not foresee the following pitfalls:
• Fragmentation of the overall marketing effort and dilution of the brand image
• Increased production complexity resulting from shorter production runs and
more frequent line changeovers. (These are somewhat mitigated by the ability to
customize products toward the end of an otherwise standardized production
process with flexible manufacturing systems.)
• More errors in forecasting demand and increased logistics complexity, resulting
in increased remnants and larger buffer inventories to avoid stockouts.
• Increased supplier costs due to rush orders and the inability to buy the most
economic quantities of raw materials.
• Distraction of the research and development group from new product
development.
The unit costs for multi-item lines can be 25% to 45% higher than the theoretical cost
of producing only the most popular item in the line. (See the Chart "The Cost of
Variety.") The inability of most line extensions to increase demand in a category
makes it hard for companies to recover the extra costs through increases in volume.
And even if a line extension can command a higher unit price, the expanded gross
margin is usually insufficient to recover such dramatic incremental unit costs.
The costs of line-extension proliferation remain hidden for several reasons. First,
traditional cost-accounting systems allocate overheads to items in proportion to their
sales. These systems, which are common even among companies pursuing a low-
cost-producer strategy, overburden the high sellers and undercharge the slow movers.
A detailed cost-allocation study of one line found that only 15% of the items
accounted for all the brand's profits. That means that 85% of the items in the line
offered little or no return to justify their full costs.
Second, during the 1980s, marketers were able to raise prices to cushion the cost of
line extensions. A review of 12 packaged-goods companies shows that price
increases in excess of raw-material-cost increases contributed 10.4 additional
percentage points to gross margins between 1980 and 1990, but 8.6 points were
absorbed by increased selling, general and administrative (SG&A) costs. Now that
low inflation and the recent recession have restricted marketers' ability to raise prices,
margins will be more clearly squeezed by new line extensions.
Third, line extensions are usually added one at a time. As a result, managers rarely
consider the costs of complexity, even though adding several individual extensions
may change the cost structure of the entire line.
Once a company's senior managers take the time to examine the downside of
aggressive line extension, rationalizing the product line becomes a fairly
straightforward process.
Activity 2
Take two leading Colour television manufacturers in India and analyse the changes in
their product line over the last five years and its affect on the total market share of the
company.
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4.5 FACTORS INFLUENCING PRODUCT LINE

DECISIONS
An analysis of a product's potential to achieve a desired level of return on the
company's investment is an essential component of the marketing planning process.
An analysis of this type not only assesses financial opportunities but also provides
ideas about bow to compete better given structural characteristics of the category.

The various factors influencing the product line decisions of a corporation are:

Category Size

Category size is an important piece of data about any market. It is clearly an

important determinant of the likelihood that a product will generate revenues to
support a given investment. In general, larger markets are better than smaller ones.
Besides having more market potential, large categories usually offer more
opportunities for segmentation than small ones. Large markets, however, tend to
draw competitors with considerable resources, thus making them unattractive for
small firms.

Market Growth

Market growth is a key market factor advocated by various planning models. Not
only is current growth important, but growth projections over the horizon of the plan
are also critical. Fast-growing categories are almost universally desired due to their
abilities to support high margins and sustain profits in future years. However, like
large categories, fast-growing ones also attract competitors.

Product Life Cycle

Category size and category growth are often portrayed simultaneously in the form of
the product life cycle. Usually presumed to be S shaped, this curve breaks down
product sales into four segments: introduction, growth, maturity, and decline. The
introduction

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 Product Line Decisions
and growth phase are the early phases of the life cycle when sales are growing
rapidly, maturity represents a leveling off in sales, and the decline phase represents
the end of the life cycle.

In the introductory phase, both the growth rate and the size of the market are low,
thus making it unattractive for most prospective participants, who would rather wait
on the sidelines for a period of time. When market growth and sales start to take off,
the market becomes more attractive. In the maturity phase, the assessment is unclear;
while the growth rate is low, the. market size could be at its peak. Finally, the decline
phase usually is so unattractive that most competitors flee the category.

Sales Cyclicity

Many categories experience substantial inter year variation in demand. Highly

capital-intensive business such as automobiles, steel and machine tools, are often tied
to general business conditions and therefore suffer through peaks and valleys of sales.

Seasonality

Seasonality - intra year cycles in sales - is generally not viewed positively. Seasonal
business tends to generate price wars because there may be few other opportunities to
make substantial sales. However, most products are seasonal to some extent. Some,
are very seasonal.

Profits

While profits vary across products or brands in a category, large inter industy
differences also exist.

These differences in profitability across industries are actually based on a variety of

underlying factors. Differences can be due to factors of production (e.g., labour
versus capital intensity, raw materials), manufacturing technology, and competitive
rivalry. Product categories that are chronically low in profitability are less attractive
than those that offer higher returns.

A second aspect of profitability is that it varies over time. Variance in profitability is

often used as a measure of industry risk. Product managers must make a risk-return
trade-off, evaluating the expected returns against the variability in those returns.
Attractiveness of Market Variables
Attractiveness
High Low
Market size + -
Market growth + -
Sales cyclicity - +
Sales seasonality - +
Profit level + -
Profit variability - +

4.6 CATEGORY FACTORS INFLUENCING PRODUCT

LINE. DECISIONS
Although the aggregate factors just described are important indicators of the
attractiveness of a product category, they do not provide information about
underlying structural factors in ' assessing the structure of industries: such as

• The threat of new entrants.

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• The bargaining power of suppliers.
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• The amount of intracategory rivalry.

• The threat of substitute products or services.

Threat of New Entrants

If the threat of new entrants into the product category is high, the attractiveness of the
category is diminished. Except for the early stages of market development, when new
entrants can help a market to expand, new entrants bring additional capacity and
resources that usually heighten the competitiveness of the market and diminish profit
margins. Even at early stages of market growth, the enthusiasm with which new
entrants are greeted is tempered by who the competitors are.

the barriers to entry erected by the existing competition are key to the likelihood that
new competitors will enter the market. This sounds anticompetitive and illegal, but it
is only definitely anticompetitive; making it difficult for new competition to enter the
market. Some of the potential barriers to entry are -
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Distribution
Bargaining Power of Buyers

The following diagram is useful for discussing the power of both buyers and suppliers:
Suppliers -> Category of Concern -> Buyers

Buyers are any people or institutions that receive finished goon or services from the
organizations in the category being analyzed. Buyers can be distributors.
manufacturers, original equipment manufacturers (OEMs), or end customers.
Suppliers are any institutions that supply the category of concern with factors of
production such as labor, capital. raw materials, and machinery.

High buyer bargaining power is negatively related to industry attractiveness. In such

circumstances, buyers can force down prices and play competitors off against one
another for benefits such as service. Some conditions that occur when buyer
bargaining power is high include the following:
1). When the product bought is a large percentage of the buyer's costs.
2). When the product bought is undifferentiated.
3). When the buyers earn low profits.
4). When the buyer threatens to backward integrate.
5). When the buyer has full information.
6). When substitutes exist for the seller's product or service.
Again, the product manager's concern is to decrease buyer power. This is
accomplished, for example, by increasing product differentiation (e.g., making your
services such as technical assistance or manufacturing-related consulting, and
building in switching costs. Thus, the implications of this analysis of buyer power are
as critical as is the overall concept of buyer power.
Bargaining Power of Suppliers
High suppliers power is clearly not an attractive situation because it allows suppliers
to dicate price and other terms, such as delivery dates, to the buying category. Some
conditions that prevail when supplier bargaining power is high are:
1) When suppliers are highly concentrated, that is, dominated by a few firms.
12 2) When there is no substitute for the product supplied. ,
 Product Line Decisions
3) When the supplier has differentiated its product or built in switching costs.
4) When supply is limited.

Current Category Rivalry

Product categories characterized by intense competition among the major participants

are not as attractive as those in which the rivalry is more sedate. A high degree of
rivalry can result in escalated marketing expenditures, price wars, employee raids,
and related activities. Such actions can exceed what is considered `normal' market
competition and can result in decreased welfare for both consumers and competition..

Some of the major characteristics of categories exhibiting intensive rivalries are:

• Many competitors
• Slow growth
• High fixed costs
• Lack of product differentiation
• Personal rivalries
Pressure from Substitutes
Categories making products or delivering services for which there are a large number
of substitutes are less attractive than those that deliver a relatively proprietary
product, one that uniquely fills a customer need or solves a problem. Since almost all
categories suffer from the availability of substitutes, this. may not, be a determinant
of an unattractive product category. However, some of the highest rates of return are
earned in categories in which the range of substitutes is small.

Category Capacity

Chronic overcapacity is not a positive sign for long-term profitability. When a

category is operating at capacity, its costs stay low and its bargaining power with
buyers is normally high. Thus, a key indicator of the health of a category is whether
there is a consistent tendency toward operating at or under capacity.

Attractiveness of Category Factors

Attractiveness High Attractiveness Low Attractiveness

Threat of new entrants + -
Power of buyers + -
Power of suppliers - +
Rivalry - +
Pressure from substitutes + -
Unused capacity situations - +

Activity 3

If you are a car manufacturer aiming at the Indian market. What are the conditions
that will influence your product line decision. Enlist all the factors and decide about
the length of your product line.

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4.7 SUMMARY
There are lots of external and internal factors affecting the product line decision of a
particular product line manager. The decision about the product line ultimately is a
function of the company's short term and long term, objectives and the external and
internal factors as mentioned earlier. This should be the only criteria for reaching at a
product line decision aimed at improving the overall profitability of the firm.

4.8 SELF ASSESS ENS' QUESTIONS

Product Line Decisions. are crucial and vital in a corporation. Discuss the factors
influencing the product line decisions.

Comment on the demerits associated with line extensions.

4.9 FURTHER READINGS

Kotler, Phillip, 2002 Marketing Management, Prentice Hall of India Pvt. Ltd., New Delhi.
Rainanuj Majumdar, 1998 Product Management, Vikas Publications-New Delhi.

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