LINE EXTENSION:Reaction to negative side of extensions, Immediate actions for better managing line extensions

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Brand Management (MKT624)

Lesson 22

LINE EXTENSION

Introduction

The discussion in this lecture moves on to the negative sides of extension. Having known those

we shall be in a better position to realistically manage extensions and that precisely is going to

be an important part of this lecture.

Negative side of line extension

1. Retailer power

When all managers like to extend with similar objectives, the obvious results are

bottlenecks at the retail level. This clutter leads to selective attitude on part of retailers

who obviously are more receptive toward more powerful brands. Those that get

discriminated try to react by getting into promotions, thereby making retailers and

consumers happy at the same time. What ensues is obviously the price wars and erosion

of brand loyalty. Not good for the brand!

2. Lack of scale economies

As against a mono product, handling and managing a variety of products is cumbersome

from production, logistics, inventory, and costing points of view. Smaller runs deprive the

company of scale economies. They are more expensive. According to one study,

compared with an index of 100 as the cost of production for a mono product, the

corresponding

cost

index

for

Cost Index Mono vs. Differentiated Products

differentiated products is shown on the

diagram1.

Economies of scale take on added

importance if the brand sells in high

Figure 26

volumes across a huge geographic area

positioned on consumer friendly pricing.

3. Non-controlled extension weakens range

Extensions without strong rationale can

145

135

become counter-productive, because

132

creating meaningful positioning for a

100

variety of products within the same line

becomes challenging. All positions have

to be created with subtle yet distinct

differences.

Without

meaningful

differences, products tend to eat into

each other's volume and cause

cannibalization!

Reaction to negative side of extensions

There has been lately a tendency on part of the companies to de-segment or counter-segment

their markets. Proctor and Gamble reduced their line by about 15 to 25 percent in 1992 only

because those entries were not turning in requisite volumes and profitability1. It also leads to

consumer frustration and that's what we learnt in terms of consumer revolt. The factor of scale

economies takes a turn for better under the circumstances of de-segmentation. Lesser number

of offerings leads to higher volumes, which result in lower costs of producing.

Brand Management (MKT624)

Immediate actions for better managing line extensions

1. Improve cost accounting systems

Management experts lay a lot of emphasis on improving cost accounting systems.

Experience shows that many companies are system-deficient in this regard. You must

have accurate figures to charge every range item that you produce. The objective is to

determine which items are more profitable than others.

2. Allocate resources more to high-margin items

As brand managers and good businesspeople, you must allocate marketing resources to

different items in line with their contribution to the overall profitability. The extensions

that give higher margins must get priority over those that attract occasional buyers.

3. Salespeople must define the role of each extension

Each extension has to be seen in the context of its sales value. The salespersons

responsible for each must produce figurative evidence of what they sell is worth its

existence. Salespeople must understand the costing angle and then produce results out of

the extensions that account for most of the profitable business.

They must be able to relate profitability with high volume items. Their education as part

of AUDIENCE is of significance, for mostly salespeople go after volumes no matter how

high is the cost. They must understand the actual positioning of the product along with the

strategic goals of financial growth. Volumes just for the sake of a high market share with

low profitability may not be the company's priority at all times.

Small volumes adding up to a certain total volume cost a lot more than the same total

arrived at by less number of products. Economies!

4. Encourage product withdrawal

Implement this philosophy and withdraw low volume items in a phased way so that your

existing customers do not turn away to competition; they should rather switch over to

another attractive offering within your range.

Bibliography:

1. Jean-Noel Kapferer: "Strategic Brand Management Creating and Sustaining

Brand Equity Long Term"; Kogan Page (184)

Suggested readings:

1. Jean-Noel Kapferer: "Strategic Brand Management Creating and Sustaining

Brand Equity Long Term"; Kogan Page (181-186)

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