Article

The right product choices

Common wisdom holds that if you shrink your product line, sales will drop. But companies can actually speed their growth and make more money by offering fewer products.

Par Mark Gottfredson and Olivier Duval

First published on janvier 17, 2007
min


Here's a simple quiz. Q1: When Chrysler cut the number of combinations available to car buyers, from 10 million down to six configurations that reflected the most popular choices, the result was: a) a 20% drop in revenues, or b) a 20% revenue lift? Q2: Which car company has the highest operating margins in the industry: a) Ford, which offers customers a smorgasbord of choices, or b) Honda, which offers the fewest options? In both cases, b is correct. Common wisdom holds that if you shrink your product line, sales will drop. But companies can actually speed their growth and make more money by offering fewer products. The reason: reducing the number of products or features also reduces a company's operating complexity. Our analysis of 75 companies in 12 industries ranging from cosmetics to aerospace and medical equipment to mutual funds shows that companies with the lowest complexity grow 1.7 times faster than their average competitors. The traditional aim of reducing complexity is to lower costs, but there's almost always a corresponding positive impact on revenue growth. Typically, reducing complexity helps companies increase revenues by 5%-40% while cutting costs by 10%-35%, according to Bain & Co analysis. With the clutter gone, it's easier for companies to identify the fast sellers and improve product and service quality. A significant portion of an industrial equipment manufacturer's assembly costs was tied to the many options available for its trucks. So the company offered a 5% discount for customers who chose a streamlined, modular truck. In just months, demand for the modular truck package soared to 80% of dealer orders for that class of truck. As sales grew, the company even cut into the market share of competitors, which had to match the 5% discount while still burdened by 25% more in complexity-related costs. Many companies find it difficult to understand how each new product contributes to operating complexity. Typical accounting systems do not capture the full costs—increased design and R&D investments, more inventory, complex logistics, higher purchasing and marketing costs, and clogged shelf space. An effective approach is the 'Model T' analysis, named after Henry Ford's philosophy of offering a single standard vehicle with no options. This approach has three legs: Set the cost of complexity to zero. In most companies, a few product lines account for most of the revenue and profit. By identifying a basic version of your company's core offering—the 'Model T'—and then assuming that you make only that product at your current volumes, managers can quickly grasp how systems and processes could be radically changed in a simple environment. With this baseline in place, managers can add back variety one feature at a time, tracing the impact of each feature on the production process or service delivery. Focus on what customers really need. Adding back new products or features should be based on true customer needs. Burger King introduced fresh-baked corn-dusted buns, for example, only after its analysis found that customers ranked the bun high on quality. The company figured out that managing the inventory of buns would be simpler than its bread and baguettes, which required costly frozen storage. The corn-dusted buns contributed to higher unit sales and the simpler logistics resulted in lower unit costs. Keep complexity out. Successful innovation and processes track complexity costs carefully. A plastic parts manufacturer did this by introducing items that could be produced only at a high volume for the right price. Other companies postpone complexity until late in the game—customising at the last step in the assembly or distribution process. Mark Gottfredson and Olivier Duval are partners in Bain & Co's Dallas and Paris offices respectively. Both are senior members of Bain's Performance Improvement practice.

Here's a simple quiz. Q1: When Chrysler cut the number of combinations available to car buyers, from 10 million down to six configurations that reflected the most popular choices, the result was: a) a 20% drop in revenues, or b) a 20% revenue lift? Q2: Which car company has the highest operating margins in the industry: a) Ford, which offers customers a smorgasbord of choices, or b) Honda, which offers the fewest options?

In both cases, b is correct. Common wisdom holds that if you shrink your product line, sales will drop. But companies can actually speed their growth and make more money by offering fewer products. The reason: reducing the number of products or features also reduces a company's operating complexity. Our analysis of 75 companies in 12 industries ranging from cosmetics to aerospace and medical equipment to mutual funds shows that companies with the lowest complexity grow 1.7 times faster than their average competitors.

The traditional aim of reducing complexity is to lower costs, but there's almost always a corresponding positive impact on revenue growth. Typically, reducing complexity helps companies increase revenues by 5%-40% while cutting costs by 10%-35%, according to Bain & Co analysis. With the clutter gone, it's easier for companies to identify the fast sellers and improve product and service quality.

A significant portion of an industrial equipment manufacturer's assembly costs was tied to the many options available for its trucks. So the company offered a 5% discount for customers who chose a streamlined, modular truck. In just months, demand for the modular truck package soared to 80% of dealer orders for that class of truck. As sales grew, the company even cut into the market share of competitors, which had to match the 5% discount while still burdened by 25% more in complexity-related costs.

Many companies find it difficult to understand how each new product contributes to operating complexity. Typical accounting systems do not capture the full costs—increased design and R&D investments, more inventory, complex logistics, higher purchasing and marketing costs, and clogged shelf space. An effective approach is the 'Model T' analysis, named after Henry Ford's philosophy of offering a single standard vehicle with no options. This approach has three legs:

Set the cost of complexity to zero. In most companies, a few product lines account for most of the revenue and profit. By identifying a basic version of your company's core offering—the 'Model T'—and then assuming that you make only that product at your current volumes, managers can quickly grasp how systems and processes could be radically changed in a simple environment. With this baseline in place, managers can add back variety one feature at a time, tracing the impact of each feature on the production process or service delivery.

Focus on what customers really need. Adding back new products or features should be based on true customer needs. Burger King introduced fresh-baked corn-dusted buns, for example, only after its analysis found that customers ranked the bun high on quality. The company figured out that managing the inventory of buns would be simpler than its bread and baguettes, which required costly frozen storage. The corn-dusted buns contributed to higher unit sales and the simpler logistics resulted in lower unit costs.

Keep complexity out. Successful innovation and processes track complexity costs carefully. A plastic parts manufacturer did this by introducing items that could be produced only at a high volume for the right price. Other companies postpone complexity until late in the game—customising at the last step in the assembly or distribution process.

Mark Gottfredson and Olivier Duval are partners in Bain & Co's Dallas and Paris offices respectively. Both are senior members of Bain's Performance Improvement practice.