How many variations of products or services does your company offer? A few? A dozen? A hundred? More? Are all of these products really required to meet customer demand? Does it make sense to provide all these choices to your customers?
Many companies have embarked on a journey of product proliferation. In an effort to capture more market share, we have seen an explosion of customization and niche marketing. A trip to your local grocery or large retail store confirms this. For example, 352 distinct types of toothpaste were sold in 2010. There are entire aisles dedicated to cereal, dog food, and toilet paper. Have these companies enjoyed increased profits by offering all these new products? Not necessarily…
In this post, we will briefly discuss the implications of having too many products (choices) on both (1) revenue and (2) costs.
Too many choices = less sales
Let’s first review a classic marketing study that was conducted by Sheena Iyengar and Mark Lepper while they were both in graduate school at Stanford. The study examined the motivational consequences of limited versus extensive choice in an upscale grocery store in Menlo Park, California. This store (Draeger’s Supermarket) was an ideal place for the experiment because it offered a huge selection of all kinds of grocery items. At the time of the study, Draeger’s offered roughly 250 different varieties of mustard, 75 different varieties of olive oil, and over 300 varieties of jam. In addition, because of the regular presence of tasting tables, shoppers were accustomed to being offered to taste a variety of products.
Here’s how the study worked:
The researchers set up a table with jams outside of the store. Over a period of two consecutive Saturdays, research assistants dressed up as store employees and offered samples of jam. During alternating time periods, the shoppers were offered either 6 flavors or 24 flavors of jam – all from the same manufacturer. The researchers minimized the effects of the potential preference for certain jams in the 6-flavor grouping by changing the flavors with each set-up.
The results were surprising. During the time periods when 24 flavors were offered, 60% of people stopped to sample the jams. This compared to 40% of the people who stopped at the table when only 6 flavors were offered. However, of the customers who sampled 24 flavors, only 3% made a purchase. But of the customers who sampled 6 flavors, 30% made a purchase.
Contrary to what most people believed at the time, too many choices can actually result in lower sales. Customers can be attracted to a large number of choices, but when it comes time to make a purchase, too many options can make decision-making difficult and lead to fewer sales.
This consumer behavior was observed again in another study by Iynegar, who studied retirement decisions of nearly one million Americans from about 650 retirement plans. The study looked at whether the fund offerings in each plan affected the individual’s likelihood to save more for the future. When a plan offered just two funds, participation was about 75%. This compares with participation in the 60th percentile for the plans that offered 50 funds. In other words, the more funds that were offered in a plan, the fewer people participated.
Some companies have leveraged this finding to increase revenue. Iyengar notes that “When Procter and Gamble went from 20 kinds of Head and Shoulders to 15, they saw an increase in sales by 10 percent.”
The message: There is such a thing as too much choice. We are less inclined to make a decision if the number of choices we have makes us feel overwhelmed.
Too many products = higher complexity cost
All of these product offerings are not free. The obvious expense lies in the additional SKU’s and corresponding inventory carrying costs. But the cost of complexity goes well beyond this. It includes additional costs associated with:
- raw materials
- marketing, sales, & SGA
It is important to note that there are different categories of complexity:
Product complexity is associated with the sheer number of products that are offered.
Process complexity is all the non-value added activity that is required to support the products. As with most NVA, it is often hidden in the form of rework, duplication, extra communication, and non-standard procedures that are tied to the myriad of specialized products.
Organizational complexity is created when the supporting functions (like policies, metrics, reporting, staffing) are required to deliver the products to the customer.
In addition, with each new unique product, the production lines are required to make more set-ups or changeovers. This results in a loss of productive capacity, all other things being equal.A previous post provided some examples of QCO that resulted in reduced set-up time, while creating a safer work environment. This technique is a cornerstone of lean thinking.
Wilson and Perumal’s text on this topic (see references) provides a comprehensive view on how to understand the cost of complexity and establish a plan to attack it. The authors propose a two-pronged approach. Not only should we consider how to reduce the amount of complexity (through product rationalization and/or brand elimination), but we should also seek ways to make complexity less expensive (by organizational changes and set-up time reduction).
Recall the earlier experiment with product simplification of toothpaste choices? This outcome was a contributing factor in shaping a bold new product marketing strategy at P&G. Recently, A.G. Lafley announced that the company is planning to eliminate up to 100 brands – which would reduce it’s product portfolio by more than half. The consumer products giant is going to concentrate on growing the 80 brands that generate 95% of the company’s profits.
As Lean practitioners, we should work with process owners to take a strategic approach to reducing costs. By value stream mapping and working on the clear pain points, we can have an impact on the cost structure of any enterprise by making complexity less expensive. We should also advocate a discussion about the amount of complexity that exists because of our product offering. This can be a difficult conversation, as there is often a sense of personal ownership and loyalty associated with any brand. Sales and Marketing can be reluctant to discontinue any product offering because of the fear of “lost sales.”
Based on the market research and complexity cost analysis work cited here, perhaps we should challenge the belief that we need 24 flavors of jams to maximize our profits!
icon-book Waging War on Complexity Costs. Stephen A. Wilson and Andrei Perumal. McGraw Hill. 2010. ISBN 978-0-07-163913-2
Extend Profits, Not Product Lines. John A. Quelch and David Kenny. Harvard Business Review. Sept/Oct (1994).
The Art of Choosing. Sheena Iyengar. Hachette Book Group. 2012. ISBN-13: 978-0446504119
When Choice is Demotivating: Can One Desire Too Much of a Good Thing? Sheena S. Iyengar and Mark R. Lepper. Journal of Personality and Social Psychology, 2000, Vol. 79, No. 6, 995-1006
Lafley’s P&G Brand Cull and the 80/20 Rule. Michael Schrage. Harvard Business Review. August 4, 2014.
Photo credit: https://flic.kr/p/aBLKwn. Kaytee Rieck. November 3, 2011.
Photo credit: http://www.britishfood.com
Photo credit: FreeDigitalPhotos.net Stock Photo – image ID: 100194169
2 Responses to “Why fewer choices can provide higher profits”
As a marketer, I love this post. I am seeing increasingly more companies in my space moving towards specialization rather than a one-size-fits-all-we-sell-everything shop. Consumers and business are becoming more demanding in their product and service needs and they expect specialized expertise rather than a huge product/service portfolio. In the clinical trials industry, pharmaceutical companies often choose preferred vendors that specialize in a particular service area. For example, a pharma company conducting oncology trials may find a contract research organization (CRO) specialized in oncology to help them conduct their trials vs. a CRO that has run trials across numerous therapeutic areas. In my opinion, reducing the number of options not only increases profitability but also dilutes the brand image less. A brand has to be careful as it adds more services/products to its portfolio to ensure that they are still in line with the core brand identity.
It’s amazing how often our instincts are wrong. Diversification and expanding product lines can feel like growth, and we (especially Americans) often seem to associate growth with success–without much analysis of the situation. The examples in your post illustrated the issue perfectly and helped me see this from a different perspective. More is not always better.