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Conquering Complexity in Your Business
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In short, discounting and price promotions can create huge inefficiencies in your administrative functions and supply chain without any net longterm gain in sales, but with permanent increased costs of maintenance It can also create extra capital and overhead costs, and be off-putting to customers Examine your pricing policies and analyze the net benefit after taking into account all the costs and impacts Simplifying the price structure may save you from having to cut the product or service line entirely
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Promotional offerings and brand extensions Promotional offerings and brand extensions have been at the center of proliferation over the last 20 years Promotional offerings are known to increase the total number of offering variations in a company by 25% to 50% The driving logic has been the desire to respond to competitor moves, absorb excess capacity, and claim a share of customers spending But, as we ve said repeatedly in this book, the costs of such complexity are rarely exposed in full Promotional offerings can clog the supply chain and can impose additional overhead costs What few benefits there are help to support a brand, or help to launch a new product are typically short lived Further, by definition, promotional items or offerings are lowvolume Line extensions can extract value from a particularly rich segment and steal market share from competitors But equally as often, their impact can be negative: weakening the line logic; losing control of retailers display (as product lines grow, retailers are forced to choose which products they shelve); and increasing costs In fact, studies of product line extensions have shown that7: Line extensions do not increase demand Unit costs for multi-item lines can be 25% to 45% higher than producing only the most popular item in the line The incremental approach to line extensions and promotions, and subsequent increases in cost, mask the fact that companies are moving towards whole new cost structures We re not arguing that promotional offerings or line extensions are necessarily a bad idea clearly in many cases they have generated value just that you should consider the full costs before taking that route
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9: Simplifying Product and Service Lines
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Simplifying Product or Service Configurations: Exploiting naturally occurring configurations
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Portfolio simplification decisions usually mean that a company needs to weed through its portfolio to cut back costs The inherent assumption is normally that simplification decisions are the last resort to cost-management because customers prefer more to less But in fact simplification can often be a value-add step for the customers it takes out much of the offering complexity that impedes the customer experience Secondly, good simplification strategies are often more about growth than about cost, as we will discuss in examples to follow And finally, simplification can be the centerpiece of an ongoing offensive strategy that focuses on capturing value for the customer Market-leading companies such as Dell and Toyota have mastered the art of using these principles proactively and integrating them into the way they do business As we discussed in 3, Dell has developed a very strong brand as a made-to-order company, advertising custom-built PCs However, Dell quickly exploited the fact that most people bought in what they called naturally occurring configurations just two of the many configurations they produced accounted for 80% of sales Dell then heavily promoted and marketed those configurations and drove demand upwards of 95% of sales even while it retained its brand leadership as the build-to-order company As Dell showed, savvy marketing can help you simplify a product or service line This strategy depends on a strong understanding of the customer and your costs to deliver the product or service But the institutionalized capability to look for natural market patterns, then capturing and marketing them to steal market share, can significantly benefit the customer and the company Another technique for managing configuration or options complexity is a stratification approach that breaks your portfolio into three categories based on how much they already have in common: options or configurations that already share a lot in common
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