Episode 53
Product range: More isn’t always profitable
Category : Sales & Distribution
Explore expert insights from Arvind Rana on managing product range expansion. In this episode, he discusses strategies for optimizing business performance, streamlining portfolios, and boosting sales.
Transcript
| Shubham Agarwal : | Hello, and a very warm welcome to the Counterpoint podcast. I’m Shubham Agarwal. Today we’re going to speak about a very interesting topic. The problem of an ever-increasing product range in a company. Now, you would have generally come across the problem that companies complain where the sales team is complaining of new products not entering the market from the company, which is hampering, the increase of sales or the increase of revenues. While on the other hand, the NPD department complains about the new products being launched and they not being able to perform the way they had envisioned at the start. Now, that’s a very difficult thing to digest, isn’t it? We have Arvind Rana with us today, Senior Partner at the Vector Consulting Group, who has helped a lot of companies solve this paradox and helped them come out of it. So, let’s talk to him more about this and discuss how can we solve this problem. Hi, Arvind. Welcome to the Counterpoint podcast. Thank you. Yeah. |
| Shubham Agarwal : | So, I think, you know, this ever-increasing range is, I think, a big concern in the companies, right? We have heard a lot about it. And like I said in the introduction as well, the NPD is also working on new products, while the products that are already there are not adding to the, you know, revenue as such. But I want to go back a step and ask you why is it that the range or the ever-increasing range is a concern. Why is that a concern? |
| Arvind Rana : | So, if you look at it, whenever an organization creates a new product, there is a lot of thought that goes behind it. They look at, are there untapped customer segments which we are not able to meet. And there’s a lot of thought process which goes into creating that product. Right. So, theoretically, every new product should add to the revenues of the organization. Correct. But what we have seen across organizations is that when they create targets for new product development for a year, those targets are always met. However, you would find that the sales realization from these new products rarely materializes. |
| Shubham Agarwal : | So Arvind, I think, I want to understand and, you know, there must be a decision at the, you know, at the stage where it was introduced, and every new range would obviously cater to some customers. Why is it really a problem then? |
| Arvind Rana : | If you see a range addition from the perspective of what is the impact of the addition of the SKU on the organization? So, if you look at it from the benefits point of view, whatever the increase in sales is the benefit that the SKU is supposed to bring to the organization. Right. At the same time, every addition of an SKU has an impact on internal parameters. For example, whenever you add an SKU, it disaggregates the demand for operations, supply chain. Now, the impact of that is your productivity measures take a hit. You have to take smaller batches, because there is a wider range the ability of an organization to respond to fluctuations in demand goes down. And then that leads to a lot of cost implications for the organization. |
| Arvind Rana : | So, what happens is that if the benefits in terms of sales do not materialize, then net it’s a hit on the bottom line of an organization. So, every addition of an SKU in that sense has the potential to deteriorate your profits. That’s the broad implication we are talking about. Right |
| Shubham Agarwal : | I will go to the, you know, the internal part of it probably in the second half of the discussion; I want to still focus on, you know, the sales not getting added because I’m sure whenever there’s a range addition, there will be some thought behind it, there will be some customer segments and there might be a new market that I will tap into and that is why the decision was taken. Yet the new product did not really help. Yes. I want to understand why that did not happen. Where do you see the reason for that? |
| Arvind Rana : | So, a lot of organizations that we have worked with, we have seen that, the research in terms of the product market fit or the pricing, everything is fine. Yeah. It’s still the product doesn’t result into sales. Now, why does that happen? And so, we discovered two very interesting factors here. Right. So, the overriding factor is that the SKU, which has all the ingredients to become a success, is not becoming a success because somewhere, the organization is not able to do justice to that product. |
| Shubham Agarwal : | Okay. Now, justice is a very subjective word, I think. Could you explain that? |
| Arvind Rana : | So, when I say justice, you’ve created a great proposition, but this proposition will result into sales only when the customer is able to see that proposition. Correct. Right. Now, what are the two key ingredients for this? |
| Arvind Rana : | One is you should be able to display the product properly so that the customer walks in, they’re able to figure out and appreciate your product experience. Right. |
| Arvind Rana : | And interestingly, one of the organizations that we are working with, had a product basket of over 1000 SKU’s. Okay. And so, we said, what’s your ability to display or how many products can you really display? And you figure out that a typical store will display somewhere between 50 to 70 SKU’s. That’s the ability of a store to display. Okay. But we do understand that there are regional nuances. We cannot have the same products getting displayed in North and in South. So, you need to have that variety in place. Right. Right. So of course, you have to factor in that. So, even if you factor that and, on top of that, you have different store formats, COCO would probably keep more premium. COCO is a Company-Owned Company-Operated stores where you would probably want to display more premium products. So, let’s say there are dealer outlets where you may display more mass category products. Right. Yeah. So, we said that, let us consider all these factors and let’s try to figure out what is it that you can really display. Yeah. And even after being very safe, okay, maybe we can display a little bit more. And even after doing that, we could reach a number of around 500. Well, that’s almost half. Yeah. So even if I display and the display for North is separate and South is different, but I am still not able to reach that number. So that’s the number which you could reach. Okay. |
| Arvind Rana : | On top of that, there is another factor at play. Yeah. And that is the ability of a salesperson to explain the product to the customer. When a customer walks in, a salesperson should be able to explain the products to the customer. Right. So, we said, okay, let’s do an experiment. Let’s call a couple of your salespeople and maybe ask them about the features of some of the products that you recently launched. Okay. Interestingly, the salespeople could not explain much about it, to the extent that, they said “okay, yeah, something, some product was launched and yes I am aware”, but they could not really explain. |
| Shubham Agarwal : | They could explain a few products, but they could not explain all the products. |
| Arvind Rana : | Yeah. So, we randomly picked products and said, ‘Can you explain?’ and they had a tough time. Right. Okay. It was sort of leading to frustration that “…there are so many products getting launched, how can you expect us to remember the features of all the products?” |
| Shubham Agarwal : | Right. Interesting. |
| Arvind Rana : | So, this, this created a great realization in the mind of the organization that while I spent so much money in designing the product, creating a story around that product and, and, you know, you do all that marketing campaigns around that product, but when the customer walks in, the salesman is really not able to explain the features. Right. And this, I called as the another limiting factor that, you know, okay, you are able to display, but how much are the salespeople capable of explaining? |
| Shubham Agarwal : | So Arvind, assuming that, you know, the justice is taken care of, both the points are taken care of, is there anything else as well that is a concern? |
| Arvind Rana : | Absolutely. So, let’s say, from a justice point of view, you have the ability to do justice to a product, right? Yeah. Then the second factor, which comes into play is, is it really financially viable to have one more product? Okay. And that’s where the internal factors come into play. Right. Yeah. So, if you look at, what is the impact of an additional SKU on your internal parameters is what we need to understand with every addition of an SKU, the demand gets disaggregated. Right. Right. What do I mean? The segments are getting… yeah. So, the demand is getting disaggregated, and what that does is that in operations, then you have to take more setups and smaller batches are there, and that starts impacting your productivity parameters. Right. And when that starts to happen, it is eventually going to impact your cost structure and hence the ability of that product to sell, eventually, you want to make some money. So that is something which it’s very important for us to understand that addition of an SKU does not come free, there is a cost to it. Right. Right. So that’s the first cost. Second is that to do justice, you have to create a value proposition, you have to spend on marketing. So, there is a lot of spending that goes every time you bring in a new product. Right. Right. Third impact is that when the demand gets disaggregated the ability of operations to adjust to fluctuations in the demand goes.
So, if there are a hundred products, it becomes difficult for me to respond to changes in the demand creation. And when that happens, I end up spending more to make up for that demand. I have to, maybe expedite or I have to do overtime or all those things so that the sales are not lost. Right. So, all these implications are there, which, if the sales do not materialize, then these costs are going to hit your bottom line. Right. And that is why, this equation is very important. Okay. |
| Shubham Agarwal : | But as good as there is a discussion about adding a product, I could also, uh, some of the products which are not performing, uh, you know, quite clearly, I can start to discontinue them as well. Isn’t it? And therefore, create a balance between new products being added, and old ones being discontinued. |
| Arvind Rana : | Absolutely. So, I’ll tell you an interesting story. See, one of the organizations, they make home furniture, okay and, so we said, look, as an organization, you cannot afford to have so many SKUs, you need to trim it down. Right. And so, the design team sort of got into action, and they said, we want to present to you, you know, why these products are there, which you were saying should not be there. And they were presenting, each product category, why it makes sense, what is the theme, and what is the story around it? Or why what segment of customer does it take care of? Right. So, what we realized in that discussion is that theoretically for every product, there is a logic of existence for that product. So, every product has a logic and there is a reason why it should exist. Makes sense. Yeah. So, what we are saying is, we are not questioning why that product should be there. Correct. What we are saying is how many products should be there? So that’s the distinction that we are talking about. Now, when we went into this journey of truncating the product range, a lot of things come into play. Okay. So, the first, first thing that comes into play is that there is always hope that because you spend a lot of money to bring that baby into this world. And when you do that, you don’t want to give up as humans. We are not designed to give up. Right. And so, there’s always that hope that you know, maybe next year this product will do better. So, what we realize is that while it’s very easy to create consensus on the introduction of a product, it is very difficult to create consensus on discontinuation of a product.
Also see this element comes that, you know, there’s, there’s this hope factor comes into play. So, the second factor that comes into play is that when you question the existence of a product, you will realize that there is always that one customer or that one channel partner for whom that product is very important. Or that one salesperson who says that, you know, in Guwahati this product sells a lot, right? And you cannot afford to get rid of this product, right? And that sort of questions, it brings out the question, why should we, let’s, let’s continue with this product. So that is another factor which is at play, which avoids the discontinuation. And that’s why we see across organizations that while products get added, discontinuations are very rare. And so what happens is over a period of time, the range keeps on growing up. Yeah. Unless, until the negatives are so, so visible and so evident, then you start the consolidation phase. The organizations do have these phases of rampant, increase in product range and then consolidation. |
| Shubham Agarwal : | Okay. So, I think, you know, that’s quite a detailed analysis of all the problems that happen because of the ever-increasing range in an organization. What is the way out? How do we start to solve it? How do we break the conundrum? |
| Arvind Rana : | Absolutely. Absolutely. So, what we have seen, and let’s say if you sort of try to visualize, let’s say this is the range, which as an organization, you have, this is your ability to display and do justice to the, and we’ve seen that organizations, all the organizations are trying to increase this. Whereas this, the efforts are very limited. Whereas if you look at it this way, the logical thing is to increase your ability to do justice to the product range. That’s the action which is required. Now, how do we sort of bring the organizations out of this problem statement. So, what we try to do is, the first step is to logically agree that this is the maximum range which you can do justice to. Okay. And yes, there is no mathematical number around it. There is no way you can do a mathematical analysis and come up with this. There is a level of intuition, which is there. But when people realize and think from this perspective, they are able to truncate the range to a great extent that, okay, yes, this makes sense. Right. Yeah, we don’t need more than this and probably anything more than this is a, is a cost rather than a benefit to the organization.
Now, once this is done, the second important step is that every time you want to add an SKU to your product portfolio, you have to decide which SKU is going to get discontinued. |
| Shubham Agarwal : | Therefore, I do a ‘One-In One-out’ sort of. Absolutely. And it’s a very difficult step to implement. Which one to choose to? Yes. To be killed. |
| Arvind Rana : | But organizations have realized that it makes a lot of sense, and it makes financial sense. It makes sense from the, if you look at from a salesman perspective; if you look from the design team perspective, it makes a lot of sense to do that. Right. And that’s how we’ve been able to convince organizations to do this. |
| Shubham Agarwal : | Right. Lovely. I want to understand some of the benefits that we’ve created because of this and the kind of impact that we’ve created because of the solutions that have been implemented across some of the companies. Can you talk about that? |
| Arvind Rana : | Absolutely. So, if you look at the first benefit which comes when we implement this is that now your marketing team, your, top management, sales, they are able to figure out what is the problem with an SKU which is not selling. Because when you have so many, you are not able to do any analysis. Right. Now you have taken care of all the conditions, that justice is being done to this product. That’s when you can really figure out what is there, is there some pricing issue, or is there some feature issue, which is there in that product. So, that realization starts happening when the range is, truncated all the regular parameters are out. Now it’s about fitment to the customer. So that is something, which happens. What also happens is because you’ve now truncated the range, the demand is disaggregated. So, you see a lot of cost benefits which come into place. So, your ability to optimize your operations, supply chain, everything that starts to come in. And what we have seen is that this change alone is able to impact your sales by around 15%-20%. Because now salespeople have more focus. They are able to talk about the product. You are able to display properly because there is no pressure to display in an improper way, but just because new products are getting launched. Right. So, the process of ‘One-in One-out’ ensures that your display hygiene is in place, and the mind of the salesman is uncluttered. Yeah. So, all things, all these things start impacting your sales in that sense. So that is something which we’ve seen that those are the results that you could immediately look at when you do this. |
| Shubham Agarwal : | And I think this would cut across industries, right? Or is there any specific industrial domain that this applies to? |
| Arvind Rana : | So, if you look at the construct of the solution, it’s very generic. Of course, there would be nuances for that industry that, you know, for example, let’s say an online player, how do, what do you really call as display? Yeah. Right. So, these definitions are very different. So those nuances would be there, but the overriding factor is I should have only that much product range to which I can do justice. That’s the overriding factor, which works. |
| Shubham Agarwal : | Lovely. I think, uh, we’ll end the discussion at a high point of justice, so to say because I think that’s an extremely important point to be kept in mind. Uh, so thanks a lot for this discussion. I mean, I think that was really helpful. It really helps our listeners as well, you know, to be able to look at their own environments with this, with this eye. Absolutely. Thanks a lot. |
| Arvind Rana : | Thank you, Shubham. Right. |
| Shubham Agarwal : | So, thanks to all the listeners once again for giving us your time and, you know, for loving the podcast so much, uh, we’ll keep bringing more episodes, more interesting topics to discuss on the podcast and, we’ll be back soon with another episode as well. Until then, this is Shubham signing off. |
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Vector Management Consulting Pvt. Ltd.
10th floor, Thane One, DIL Complex,
Ghodbunder Road, Majiwada,
Thane (West), Maharashtra - 400610, India.