Wednesday, June 22, 2011

Is Product Proliferation Killing Your Profitability?

Product proliferation is often a function of improving customer service and experience.  A customer says they love product A and would buy millions of them -- if only you could change the color from black to green.

From that point on, it's a slippery slope to where if one customer can make a special request, then another makes a special request.  The next thing you know, you're managing an ever increasing number of SKUs (Stock Keeping Units) and the amount of paperwork and quality system management has gone up exponentially.

What you may NOT notice is that product proliferation creates a quiet profitability leak .  Over time, that customer that said they would buy millions of units, only ends up buying a couple hundred thousand.  And in a couple of years, the number of units starts decreasing and before you know it, your profit margin is as thin as a human hair.  Even worse, you may not even notice how many products you have that fall into this category.  All you see is a steadily shrinking margin.

In the past, companies had two choices; discontinue the products that don't meet margin levels and risk losing customers or keep unprofitable products and risk losing their business to bleeding profits.  This often found the sales and marketing folks in conflict with manufacturing or finance departments.

But there is a way to to reach a compromise between these two sides -- you can actually get your customers to choose which products they want to keep and which products they want to ditch.

Get Your Customers to Choose the Product Offerings They are Willing to Pay For

Conjoint analysis is a statistical technique used in market research to determine how people value different features that make up an individual product or service.  It's a great methodology for product rationalization because it gives customers the ability to choose what features they want at what price.  Is having their widget available in blue worth a 50% price increase?

Set up your conjoint questions by describing the different product choices in terms of features and the different levels for each feature.  For example, if you're trying to determine what TV's to sell, you would identify the different features that are available i.e. screen size, format,  and price. Then list all the levels or options for each feature such as LCD, LED formats and price levels.

The Survey Analytics Conjoint Analysis module will then create options for your respondents to choose from.  Respondents will choose their favorite offering mix or rate the available offering mixes.  The results will tell you exactly which product offering they value most and the price they are willing to pay for each offering.

Ultimately, you may find yourself retaining products you might have eliminated because customers are willing to pay a higher price for specific features.

Conjoint analysis used to be a time intensive, error-prone and expensive research method.  But today's technology has made it much easier to create, run and analyze the data.

If you've got too many products to maintain that have increased complexity and decreased your bottom line - running a conjoint analysis on your products will not only get your customers engaged in the process - you'll feel good about cutting products that your customers don't value and keeping the ones they do at an increased price.
iframe {max-width:100%;} .embed{ width: 100%; }