The Law of Line Extension
The Law of Line Extension
The Law of Line Extension has been created with the belief that a company should not overextend themselves to the point that they want to encompass an entire market of many different products at the cost of losing their market share. Many companies are able to rise to the top of their market to become first in class for their product. There are times when a product or the company that has created and established a first in class product begins to achieve a steady market share. At this point in time, many companies have decided to take advantage of their success and expand their existing product line to enhance a new market.
One example would be for Coke to begin selling a new flavor of their product. The goal behind this strategy is to entice current customers with new products as well as expanding the company’s market to reach new customers (Anzalone, 2013). Pros to Line Extensions Line extensions are very attractive to companies for several reasons. The idea of expanding on the product that has proven to be successful is such a desirable concept that companies perceive these to be a low-cost, low-risk opportunity. Line extensions are frequently used as a short-term competitive edge over the competition.
One company may have the ability to satisfy several needs of a single customer with a larger variety of products (Quelch, Kenny, 1994). Consumers want to try out brands that they have never used before. There is a large market of consumers that can be enticed to try a new product from a company that they have not purchased from in the past. Line extensions can bring in new customers. Line extensions also help companies keep existing consumers by offering more of a variety of products in one location. Another benefit of line extensions is that they provide companies the opportunity to have a larger range of price points (Quelch & Kenny, 1994).
Companies choose to either add a new product to their inventory or to replace an item that may be in need of an upgrade. Gorden (2004) suggests you follow four steps when considering line expansion: 1. The exact needs of the client, for each high-priority market segment, must be defined. 2. After extensive research, classify the exact product(s) that the customer base is drawn to. 3. Select the correct routes that will be used for the sales and distribution in order to ascertain the highest level of penetration for the target market. 4. Determine how the new extension will be introduced into the selected market segments and create a one of a kind value proposition.
Benefits of Line Extension Anzalone (2013) believes that a “line extension can reinvigorate a product line, bringing it back into the public awareness by drawing new customers and higher profits. ” Profits can be increased by a line extension by allowing manufacturers to break into new markets and diversifying their inventory. Another benefit is that products created by a line extension are able to be promoted at a lower cost, because the consumer is already familiar with the company brand.
Therefore, the company does not need to ‘sell’ their brand name as the brand is already well established (Anzalone, 2013). Frequently, line extensions are created to be a quick fix for a company’s sudden loss of revenue or failure. The quick fix seems to be a perfect solution to a short term problem because most line extensions only contain small changes to the original product. These line extensions help to create an increase in sales at a rapid rate and prove to be fairly inexpensive. A line extension can also offer a more predictable outcome versus a brand new product.
However, Quelch and Kenny (1994) also states that “Line extensions rarely expand total category demand. ” Risks Companies are forced to take into consideration all of the risks involved when creating a new line extension. If a new product proves to be a massive failure, the reputation of the company name may be ruined. Meaning that if this same company works hard to create a perfect product, in the future, consumers may not be willing to try it based on the company’s previous downfall. (Anzalone, 2013). Each new line extension needs to have a strategic plan for distribution and sales.
Companies must remember that just because they have created a new product does not guarantee that all stores will be inclined to carry this product. There may be fifty types of the same product but store shelves have only been allotted for a possible twenty. Line extensions do not always increase the category demand, and the profits gained from line extensions are normally short-lived. Quelch and Kenny (1994) states “ Line extension proliferation spreads sales across more items, reducing retailers’ average turnover rate, and putting previously profitable SKUs at risk”.
Another risk of line extensions is cannibalizing your existing products. Companies should be aware of this risk and take precautions to avoid cannibalizing their existing successful product. Minimalizing the Risks Anzalone (2013) states that you can reduce the risk of failure of a line extension failing by accurate cost accounting, “allocating resources to popular products, research consumer behavior, coordinate marketing efforts, work with channel partners, and foster a climate in which product-line deletions are supported”. Creating different sales strategies is important to the life of a brand or product.
Sampling of a product can be an excellent way of marketing not only the new product, but the brand name as well. Free sampling or giveaways of a certain items can help long-term sales of all products for a brand name. Households that have participated in free sampling of a new products have shown to create a 475 percent sales increase on the day of sampling. This is in comparison to households that did not sample the product per the “Report on In-store Sampling Effectiveness” that was conducted by Knowledge Networks-PDI on behalf of the marketing services company PromoWorks.
Moreover, consumers that did sample a product were 11 percent more likely to buy this product on other occasions over the following 20-week time frame. As well as purchasing the sampled product, consumers were 6 percent more likely to purchase another product that was created by the same company (Sales & Marketing Management, 2010). Successful Line Extensions Even though there are many line extensions that do not work, there are those few rarities that have flourished with the developing a line extension. A great example is the Doritos brand of corn chips.
Sales of the line extension, Cool Ranch Doritos, created more than $1billion increase in sales. Another success would be the introduction of diet and caffeine-free soft-drink products. No soft drink company can rise above the top without a diet and/or caffeine free version of their product (Hardi, et al, 1994) The tastes of consumers are an ever changing and evolving market. Therefore, companies must continually be on the lookout for a new development of product-line extensions. Hardi et al. (1994) says with each new addition to a company’s line extension comes the increased competitive reality.
For example: Arm & Hammer created toothpaste that contained baking soda. Crest and Colgate were forced to create a line extension that would compete with this brand. In 1992, Colgate created a new line extension that offered stand up tubes of toothpaste that were a huge success. All other brands were forced to create their own version of this tube thus creating their own line extensions. Over Extending a Line Budweiser is currently referred to as Bud. Consumers identify Bud as some type of liquid alcohol due to their ever increasing choices of beer flavors.
There is no way for a consumer to hear the name Bud and be able to recognize the original bottle of Budweiser beer as the first item that comes to their mind. The Budweiser Company has created so many line extensions of the original product that the consumer can become slightly overwhelmed with all the choices. In one year, the Budweiser Company introduced two separate line extensions including Bud Light Platinum and a margarita-flavored Bud Light Lime Lime-a-Rita. In this same year, a separate line extension called the Bud Light Golden Wheat was pulled off of the production line due to a decrease in sale (Hochwald, 2013).
Possible solution The intention of the owner of the Budweiser Company, Anheuser-Busch, has been to create of a variety of products that would not only create new customers, but entice existing customers with a variety so that they would stay with his company rather than venturing out to others. However, in doing this he gave up the strong best in class reputation that had once given him the lead over all other beer companies; because consumers began to think less of the original beer after so many failed line extensions.
Anheuser-Busch should have held tight to their Budweiser product and created a completely new company name for their line extensions (Hochwald, 2013). Final Thoughts As human beings, we have created the idea in our minds that more is always better. Unfortunately for our egos, this phrase is normally never the case. One person cannot be the best in all things. This holds true for a company that thinks that the more types of diversified products they have the better their success rate.
This is just the opposite of creating a successful and thriving business Before creating a line extension you should do some market research like a survey customers, marketing partners or distributors and evaluating competitive products. This can help validate the present level of demand for the product and the best channels for sales distribution. If your research is solid and you proceed with an analytical eye, your line extension will increase sales. It will also help you reach new markets and build market share overall for your growing business (Gordon, 2004).
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 1 October 2016
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