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Product Variety Management and Sales Volume

July 2009 Pricing, Product, Selling 1 Comment

Choice is good, more choice is better … or is it?  Is it always better to offer customers more choices, or should companies restrict the choices available to customers in some situations?

Versioning or Add-ons

In making decisions in pricing and product strategy, executives face this challenge every time they ponder whether the company should pursue an add-on strategy or a versioning strategy.  While this question does not have a definitive universal answer, we can understand some of the tradeoffs inherent in each alternative.  By examining the tradeoffs, we should be able to improve executive decisions and company revenue.

In an add-on strategy, executives allow customers to customize their product, adding on specific modules or complementary products to fit their specific needs while avoiding the add-on products that are unimportant to their purchasing goals.  Customer choice is relatively free.

In a versioning strategy, executives define a product line up.  Each version will contain certain features and deliver unique benefits.  Customer choice becomes restricted.  In making a purchasing choice, customers accept that the chosen version may deliver some unnecessary functionality but will also deliver the specific benefits that meet their purchasing goals.

Given the fact that versioning strategies inherently reduce choices in comparison to add-on strategies, one may conclude that versioning would be an inferior strategy.  Yet experience and research demonstrate otherwise in many situations.

Customer Purchasing Behavioral Research

Standard economic theory implies that with more choices available, there is a greater likelihood that customers can optimize their utility.  The logic continues to imply that companies that offer more choices are more likely to be able to offer the optimal choice for more customers, and therefore, more likely to sell more goods.

However, consumers are not economic welfare optimizing machines.

At Draeger’s Supermarket in Menlo Park, CA, researchers set up a tasting booth.  On the table were either six or twenty-four different jars of jam.  When did customers stop?  60% of the customers stopped for the wider selection compared to just 40% for the smaller selection.  But, for the important metric, when did customers purchase?  Only 3% of all shoppers purchased when offered a wide selection while 30% of shoppers bought jam when offered a narrow selection.  In other words, restricting choice from twenty-four to only six improved sell-through by a factor of 10.

The Draeger’s Supermarket study isn’t the only evidence that fewer choices can improve sales.  Procter & Gamble recognized a similar challenge first with Head and Shoulders, and more recently with Pantene.  Aldi, Ikea, and other retailers have also bet on simplicity over variety, each with strong overall results.

Gerd Gigerenzer explains this phenomenon:  “There is a limit to the information a hungry mind can digest, a limit that often corresponds to the magical number seven, plus or minus two, the capacity of short-term memory.”

Faced with too many choices, customers often end up making no choice at all.

Marginal Tradeoffs

An add-on strategy confronts customers with a choice similar to the twenty-four jars of jam, while a versioning strategy confronts customers more like six jars of jam.  Faced with too many choices, the add-on strategy may turn customers off even though it supports higher utility maximization by customers.  Meanwhile, a versioning strategy may support higher sales volume, even though it will restrict choices, and therefore reduce the potential of customers to maximize their utility.

Pricing and product strategies are not isolated decisions.  These decisions must also accompany sales strategy.

Knowing that too many choices can thwart customer purchases, but also knowing that customers desire a wide variety of disparate benefits, can lead executives to an alternative solution.  Rather than simply collapsing customer choice through a versioning strategy, executives can support customer choice with professional selling.

Salespeople are not just hired to persuade and transact.  Any clerk can exchange cash for product and marketing literature can be persuasive.  Rather, a professional salesperson is hired to help customers through the decision tradeoffs so that customers purchase the product that delivers the best benefit to price differential, thereby improving customer loyalty, deepening existing customer relationships, and expanding the number of referrals.

Hence we come to an understanding of some of the tradeoffs between add-on and versioning strategies.  In a retail environment where transactions are managed by clerks, reducing customer choice through versioning is often better than confronting customers with excessive choices in an add-on strategy.  In a personalized selling environment where sales are managed by professional salespeople, allowing for a high degree of customization may enable customers to improve the economic welfare captured through the transaction, thus improving sell-through.

Choice available through an add-on strategy can be good, but it needs support.  If support can’t be given, reduce choices with a versioning strategy.

References

  • Sheena S. Iyengar and Mark R. Lepper, “When Choice is Demotivating:  Can One Desire Too Much of a Good Thing?” Journal of Personality and Social Psychology 79, no. 6, (2000):  995-1006.
  • Ilan Brat, Ellen Byron, and Ann Zimmerman, “Retailers Cut Back on Variety, Once the Spice of Marketing,” Wall Street Journal (Eastern Edition, New York, NY, June 25, 2009), p A1.
  • Gerd Gigerenzer, “Less Is (Sometimes) More,” Gut Feelings:  The Intelligence of the Unconscious, (New York, NY.:  Penguin Books, 2007), pp 30-32.


About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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