Optimizing Line Extensions in Uncertain Market Conditions: A Case Study

The Challenge With all the possible new product or line extension combinations, such as colors, flavors, package sizes, and scents, choosing the right lineup to introduce into the marketplace can be a daunting task. The challenge is further complicated by dynamic in-market conditions, such as retail space limitations, items being out-of-stock, or poor visibility due to shelf positioning. Successfully negotiating this high-risk landscape requires research that provides brand managers with focus and strategic direction.

A leading consumer packaged goods client recently faced a dilemma with a new line of products it was planning to introduce. While the R&D department was working on twenty potential ideas for products in the lineup, the client envisioned the line would ultimately consist of three to six products. The client needed to know what the optimal line should look like, so that R&D could focus its attention on the most promising ideas, and wanted a strategy that could adapt with changing market conditions.

In this case, market conditions would not allow the client to wait until all products were ready before launching the line. As a result, the client needed to carefully stage the introduction of the products to be included in the lineup. It was critical that early entrants introduced to the market have synergistic effects with late entrants so that maximum or near-maximum market coverage would be achieved. And since the lineup would `look' different as each product in the line was introduced, the items in the line at any given time needed to interact in a way that would offer maximum consumer appeal. Exactly which products could roll out of the pipeline, however, was still unclear. How many products would eventually be included in the line was also unclear. All these uncertainties required a strategy that would take all possibilities into consideration.

The Approach Our approach to the client's dilemma was based on Shapley Value analysis. Shapley Value analysis was developed in the field of multi-player cooperative game theory to provide a strategy by taking into account all possibilities. The key to understanding its utility is that it represents the value of each item over all possible combinations of items. Extending this to the product line problem, Shapley Value analysis assigns a value to each product calculated over all possible combinations of products with respect to a game rule, such as number of unduplicated respondents reached by the combinations, yielded profit, etc. All products are then ranked on the Shapley Value scores, from the largest to the smallest, and the optimal line is the combination of the highest scored products.

Example of Shapley Value Output Among six potential varieties, varieties 1, 2, and 3 should be offered; of these three, variety 1 is much more highly valued than varieties 2 or 3.

The combinations of items with the greatest sum of Shapley Value scores are as follows :

The Results Our solution based on Shapley Value analysis was a good fit with the client's needs. First of all, the Shapley Value solution could help the client prioritize its R&D efforts. Second, we did not know which R&D projects would fail, but the Shapley Value solution took into account all possibilities. Third, the early entrants of the line, which had highest Shapley Value scores, would always have good synergistic effects with late entrants, regardless of which products are added. This assured that the product line would be positioned in the best possible position at any given moment.

Further, Shapley Value analysis takes into account real-life marketing situations. For example, in many situations the manufacturer does not have complete control over all of the products it introduces to the market. While a manufacturer might introduce a product line of size N, there is no guarantee that N products will be available when a consumer makes his or her decision at the point of purchase. This may be due to retail space limitation, items being out-of-stock, or items not visible to consumers due to poor shelf positions. Shapley Value takes into account these possibilities in its solution set.

The Shapley Value analysis outputs provided our client with clear and measurable distinctions between the different product options, enabling the brand manager to make strategic decisions at the R&D stage and, ultimately, help assure the new product line's success in the marketplace.