In the 1984 film Moscow on the Hudson, Robin Williams plays a Russian musician who impulsively decides to defect during a tour in New York City. A local family takes him in and to thank them, the young man volunteers to do the grocery shopping - only to pass out in the coffee aisle. The choices in the American supermarket simply overwhelm him.
Twenty years later the array of products facing US shoppers is more bewildering than ever. Colgate, which sold two types of toothpaste in the early 1970s, today offers 17, from Total Whitening Plus and Sensation Deep Clean to WildMint and Berrylicious. The credit card industry, which promoted a handful of cards in the 1960s and 1970s, now offers hundreds of ways to say “charge it”. But is it truly worthwhile for firms to offer so many different options? Do weary consumers really favour product lines that carry more items? Or might firms benefit from cutting back?
Michaela Draganska, assistant professor of marketing at the Stanford Graduate School of Business, and Dipak Jain, dean of the Kellogg School of Management, introduced an innovative mathematical model that can help companies decide just how long their product lines should be in a competitive environment. Contrary to conventional wisdom, their model suggests that while regional and store brands are likely to benefit from longer product lines, big firms such as Procter & Gamble probably would be better off if they offered less variety.
Draganska, who joined Stanford’s business school faculty in 2001, has been fascinated with the subject of product proliferation ever since she came to America in the late 1990s to pursue a doctorate in marketing at Northwestern University. A native of Bulgaria, she had her own supermarket epiphany one day while shopping for yoghurt. “It was my first trip to Dominick’s, which is now part of Safeway in Chicago, and I wanted to buy some normal plain yoghurt with fat. But after 15 or 20 minutes of first trying to find the aisle, and then looking through all the varieties, I was absolutely exasperated,” the young scholar recalls. “In Bulgaria, life was very simple. You’d go to the store and ask for milk, and there’d be one type of milk. Or there were two types of cheese - yellow and white - and that was that.”
She notes that these days companies typically extend their product lines in one of two different ways. They can vary one brand in terms of price and quality (for example, BMW’s Series 3, 5, 7), an approach known as vertical line extension. Or they can keep their products within the same price and quality range and vary other attributes such as colour, fragrance or flavour: a process known as horizontal line extension (Classic Coke, Diet Coke, Caffeine Free Coke, Caffeine Free Diet Coke, and so on).
Companies often extend their lines because they think it will keep customers from switching brands and allow firms to charge higher prices. As Draganska says, “It’s a widely held belief that unless you constantly introduce new products you cannot stay in the game”. Products with new flavours or scents also tend to produce short-term sales spikes that look good on resumes. That’s important to product managers, who typically have only about a year to deliver results. If Colgate introduces a new berry-flavoured toothpaste, it makes shoppers curious. “They buy it once, sales go up and the product manager gets promoted.”
Studies do suggest that the more items in a product line, the more likely consumers will consider it. After a certain point, though, the additional profits from that berry-flavoured Colgate may not be worth the extra cost of manufacturing it. And psychological studies suggest that too many choices actually can overwhelm shoppers and turn them completely off a brand. So how can a firm determine the perfect number of toothpaste flavours or detergent fragrances to offer?
To find out, Draganska and Jain decided to focus on the world of yoghurt - specifically, two years’ worth of Nielsen data on prices, quantities, flavours, coupons and displays at grocery stores in Sioux Falls, S.D. They built a mathematical model, taking the cost factors and competitive considerations into account, to establish the link between consumers’ choices and the length of the yoghurt product lines.
As it turned out, only three of the 13 yoghurt brands they analysed would benefit from an increased line length - all of them no-frills products that currently offer limited variety at a low price. For such store brands and local brands, the researchers suggest, “a longer product line might be a signal of higher quality and boost their image in comparison to the other lower-priced alternatives”. In contrast, they determined that nationally known companies offering a large variety at a premium price (for example, Dannon and Yoplait Original) actually would benefit from reducing their line lengths.
When it comes to complex consumer behaviour, simplicity sells.