How much is too much when it comes to expanding a product line? That is the question examined in a recent article from Stanford Business Magazine.
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, Moscovites have adjusted to having choices also, but the array of products facing U.S. 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 favor product lines that carry more items? Or might firms benefit from cutting back?
Michaela Draganska, assistant professor of marketing at the Business School, recently coauthored research that can help companies decide just how long their product lines should be in a competitive environment. Draganska's work with Dipak Jain, dean of the Kellogg School of Management, has produced an innovative mathematical model that challenges conventional wisdom about maximizing consumer choice. While regional and store brands are likely to benefit from longer product lines, the model suggests that big firms such as Procter & Gamble probably would be better off if they offered less variety. Using a different approach, Business School Professor Itamar Simonson also raises questions about the wisdom of maximizing consumer choice. (See related story by Joyce Routson.)
Back in business school we studied the cereal market. The theory was that offering Frosted Cheerios and Honey Nut Cheerios and Team Cheerios and whatever else they offered in addition to regular Cheerios segmented the market share to such a fine degree that it didn't make sense for a major competitor to arise. Can anyone start a new cereal company knowing that at most they will get 1% of the market? In some ways, it helps maintain an oligopoly for the existing companies.