41 PROD INNOV MANAG o000 A Consumer-Based Approach to Designing Product Line Extensions Paul E. Green and Abba M. Krieger A high proportion of new product introductions entail line extensions (e.g., new flavors, sizes, convenience packs, features) rather than totally new products. An attendant problem with line ex- tending involves the possibility of cannibalization of the firm's current products. Paul Green and ‘Abba Krieger describe an approach for designing line extensions that employs consumer tradeoff data and a variety of search heuristics t0 find “optimal” extensions that explicitly consider the cannibalization of current offerings. The method- ology is applied t0 a case in which an agricultural chemicals firm is introducing a new soybean her- bicide ‘Address correspondence to Paul E, Green. Marketing Depart rent, Wharton School, University of Pennsylvania, Suite 1480 Steinberg Hall Dietrich Hall Philadelphia. PA 19104, 1567 EheverSoence Publishing Co Is Introduction While precise statistics are unavailable, it seems likely that a high proportion of product introduc- tions involve extensions to current product lines rather than completely new products. Ilustra- tions are legion and include such cases as the IBM XT, Yoplait’s custard-type yogurt, Miller's Lite beer, Pepsi Cola’s three-liter bottle, and so on. Line extensions typically share a large num- ber of attributes in common with the firm's parent products; moreover, they are usually advertised as part of the product family (e.g., Right Guard scented and unscented deodorants) ‘One of the principal risks in introducing line extensions involves the potential cannibalization of current products’ sales. Ideally, one would like to design a line extension that draws business solely from competitors’ brands while also en- hancing the sale of the firm's current products Such cases are rare, however, as automobile pro- ducers know only too well in their design of spe- cific models within a line. The purpose of this paper is to describe and apply a consumer-based approach to finding ““op- timal” line extensions from an analysis of con- sumer trade-off data. The methodology involves two separate sets of computer-implemented search heuristics that: 1. Develop a good set of reference products ones that come very close to being the highest utility product for each consumer, given the available range of product design levels. 2, Select an “optimal’” product(s). conditioned ‘on maintenance of the firm's current line and 9872 {PROD INNOV MANAG. test BIOGRAPHICAL SKETCHES Paul E. Greens the S.S. Kresge profesor of marketing athe Whar ion Schoo: University of Penasytana. Dr. Gren’ research erp sites quantitate methods and new measurement ecg in a= et analysis and consumer research. He har been honored fr his research by the American Marketing Astciation, the America Sta tistical Association, the American Psycholopcal Associaton andthe Marke Research Society Dr. Greenisthe author or coauthor of several books. ecading he widely sed text Research for Marketing Decision now as fut ‘ition. He i also a protic conibtor to marketing and busiest journals ‘Abba M_ Kreger i profesor of statistics and operations reearsh ‘he Wharion School. Univesity of Pearslvaia Hes the author of zautor of ariles i staisical methodology andthe iterace be tween statistical methodology and optimization theory. His erent research interest incide theoretical and empirical analyses ofthe bootstrap resampling techrique and aplication of tata methods and operations reseatch 10 problems in marketing rescah the presence of competitive brands, from the reference set obtained from the first computer program. In addition to finding the “‘best’’ line extension, the methodology produces additional descriptive detail on the extent of cannibalization and the pattern of brand switching from competitive of- ferings. Since the information is obtained at the individual consumer level, further analysis can be made of target market characteristics, given troduction of the line extension. Sources of Line Extension Sales The introduction of a new line extension can draw sales volume from four principal sources: 1. Brand switching of competitive brands to the line extension (i.e., competitive draw). 2. Brand switching from the firm's parent brand(s) to the line extension (i.e., cannibali zation). 3. Increased usage among current brand users (ie., additions to users’ brand repertoires) 4. New customers to the product class. attracted to the specific characteristics of the line exten- sion. It is an empirical matter as to how much of the line extension’s sales comes from each of these PE. GREEN AND A. M, KRIEGER sources.’ In many cases, however, line exten- jons do not increase total product class sales significantly. In these cases (the ones treated here), the primary issue is one of competitive draw versus cannibalization. Interest focuses on the firm's share of market before and after its introduction of the line extension. Joint Costs, Returns, and Competitive Retaliation The introduction of a line extension may entail consideration of a complex pattern of joint pro- duction and distribution costs, before and after its entry. These joint costs may require somewhat arbitrary allocations between parent brand and line extension. In addition, introduction of the line extension can prompt various kinds of trade reactions (¢.g., loss of shelf facings for the parent brand) and/or competitive producer reaction that is injurious to either line extension, parent brand, or both? A Simplified Approach The approach proposed in this paper makes a number of simplifying assumptions, including: 1, No consideration of competitive retaliation, at least over the planning horizon for which the extension is being evaluated 2. A cosvreturn structure in which return per unit sold is approximately equal between line extension and parent product 3. Startup costs that are sufficiently covered by the line extension's pricing so that market share (with, and without the extension) is the primary performance measure Clearly, these assumptions limit the scope of the proposed approach to situations involving products where the manufacturer's return over alternative formulations of the product is reason- ably constant, startup costs are low, and competi- tive retaliation is not a major threat (at least in the short run). However, it would seem that for some * See Pessemier (12] on the topic of product substitution and ‘complementarity. Other references that are relevant to this question are books by Urban and Hauser [17] and Wind (18) Hauser [9] describes an interesting and implementable apy proach to the problem of competitive retaliationDESIGNING PRODUCT LINE EXTENSIONS packaged goods categories (¢.g., personal care products, foods, and other consumer nondura- bles), the assumptions may hold approximately. Illustratively, the proposed methodology deals with three strategic questions: 1. Given retention of the firm's parent brand, what is the “best” line extension to add (i.e. the one that maximizes market share for the combination of line extension and parent)? 2. How does the preceding strategy compare to the case where the firm introduces two new items and drops the parent product? 3. How do the two preceding strategies compare to the case in which two line additions are made, while retaining the parent product? In each of these cases we are interested not only in market share changes for the sponsoring firm, but also its source (i.e., competitive draw versus cannibalization). Having illustrated the approach in the context of simplifying assump- tions concerning costs and competitive retalia- tion, the concluding section of the paper briefly points out a number of caveats and some possible extensions. The methodology is illustrated in the context of areal case entailing the introduction of a new line extension in the agricultural chemicals market. Study Background At the time that the study was undertaken, three brands of herbicide dominated the market for commercial soybean growers in the Midwest. ‘These will be called: Alpha (the sponsor's parent brand). Gamma (a strong competitor), and Bera (a somewhat smaller producer). The sponsoring firm’s research and development group wished to develop a line extension that would maximize the line's (including Alpha) market share. Interest fo- cused on the attributes that the line extension should have and its potential draw from competi- tive brands versus cannibalization of the firm's parent brand. It was anticipated that the new her- bicide would be priced at parity with current brands, ‘A conjoint study was authorized and imple- mented by a combination phone contact and questionnaire mailing, followed by WATS inter- viewing. A total of 108 commercial growers of PRED INNOV MARAG. 2 Ios soybeans were interviewed.* The sample was se- lected so that all (prescreened) respondents had used one of the major products (Alpha, Beta, or Gamma) during the preceding growing season. The survey was restricted to the universe of large commercial soybean growers only. Product Attributes and Study Design Table 1 shows a list of the nine attributes (and their levels), of interest to the study's sponsor ‘The telephone interview consisted of three princi- pal phases: 1. In Phase I, respondents were classified into one of three current brand groups (Alpha. Beta, and Gamma) based on direct questioning regarding which brand they were most likely to select for the next growing season. This was done by having each respondent indicate the likelihood of choosing each of the three brands, where each brand was described by both name and product attribute description (as drawn from the attribute levels of Table 1) 2. Phase II of the interview was then introduced. In this phase each respondent was told that the producers of Alpha were considering the intro- duction of a second brand of herbicide that could exhibit various characteristics, depend- ing on the outcome of the company’s research: the respondent was then guided through a hy- brid conjoint data collection task [4] consisting oft a. Self-explicated attribute level desirabilities b. Self-explicated attribute importance evalu- ations, and c. A subset (eight) of full-profile herbicide de- scriptions, drawn from a master design of 64, for likelihood-of-purchase evaluation (on a 0-100 point scale). 3. In Phase III of the interview, background data ‘on acres planted in soybeans and other crops. previous experience with each brand, and a small set of demographics were collected ‘The interview took about 35-40 minutes, on aver- age, to complete. Each respondent received mon- etary compensation for his/her participation. ” For purposes af exposition the sample size used here is smaller than that obtained in the actual studs. Also, disguising of attribute levels has been done to respect sponsor confdentiaisPROD INNOV MANAG. ‘Table 1. Attribute Levels Used in Herbicide Study PE. GREEN AND A. M. KRIEGER 1. Controlling Grasses All annual All perennial ‘Some annual and perennial ‘Most annual and perennial 2. Controlling Broadleaves Good control if used alone Good control if used with erop oil 3. Combination Effectiveness Enhanced effectiveness if combined with broadleaf killer Separate broadleaf treatment is required Crop oil or surfactant is required 4, Length of Effectiveness ‘May require more than one treatment under abnormally high seasonal temperatures ‘May require more than one treatment under abnormally low rainfall Definitely requires two or more treatments, 5. Carryover Little risk of carryover Possible injury for 1 year 6. Weather Risk Reduced control if heavy rain Reduced control if no rain Reduced control from high temperatures 7. Product Form Liquid Wettable powder Dry flowable Granular 8. Packaging Metal containers Plastic containers Rubber containers. Wax-lined box Plastic bag in a box Waterproof fiberboard pail 9. Crop Injury ‘Some risk of stunted growth ‘Some risk of burning leaves The Hybrid Model A metric hybrid conjoint model, as described in [4], but with individually estimated intercept terms, was fitted to the data: Yiravine & 8 +B Uhrig Ve where Yijgugy denotes the future purchase likelihood - stated by respondent k for profile (iyi), with level 1G = LL) of attrib- ute jG = 1). Unjip-y denotes the respondent's self-explica- ted utility (computed from the self-ex- plicated attribute desirability and im- portance ratings) denotes main effects estimated at the group level ty denotes selected two-way interactions estimated at the group level denotes least-squares approximation, 8 A vector of part worths (based on the preceding model) was then computed for each respondent* “In ths particular application no interaction terms were needed Individual correlations between actual and fited values ranged be: ‘teen 0.32 and 0.91: the average correlation Was 0.72 At this point, information was available on two items of interest: 1. The respondent's likelihood of choosing each of three current brands on his/her next herbi- cide purchase. 2. The respondent's estimated likelihood of choosing any of the new products (that might be introduced by Alpha), composable from the set of attribute levels in Table 1. Each respondent was assigned to a current brand, based on the highest future purchase prob- ability associated with Alpha, Beta, and Gamma. Assuming that no new products were introduced (and that each respondent would actually buy his/ her most preferred brand),° the respective base- level market shares were: Alpha = 43%, Beta 19%, Gamma = 38%, equaling 100%. Each cur- rent brand profile is described below in terms of the nine attributes of Table 1: Attribute levels Alpha: 411, 113, 12 Beta: 31H, 121, 162 Gamma: 111,113, 122 “Only those respondents were included whose fitted values (Grom the conjoint model correctly predicted their current brand (wen, were higher than the estimated probabilities associated with ‘competitive brands)DESIGNING PRODUCT LINE EXTENSIONS Developing a Set of Good Reference Products Given the two sets of data for each respondent: (a) his/her utility function for each attribute level in Table 1 and (b) the likelihood of choosing each current brand, given no change in the set of com- petitive offerings, our objective was to select a set of “good” potential products. These were to be drawn from the set of all possible products that could be composed from the attribute levels of Table 1. Unfortunately, the number of logically possible combinations is enormous (20,736 differ- ent possibilities) and some method is needed to develop a much smaller set of products. ‘The first algorithm in the proposed methodol- ogy has, as its objective, the selection of a rea- sonably small set of reference products that will contain at least one highly desired product for each respondent.* The computer program actu- ally provides four different heuristics for select- ing products from the attribute levels of Table 1 For expository purposes. we apply only one of these: the best-in heuristic. The Best-In Heuristic The best-in heuristic considers only the respon- dent's best product, with associated utility uB(k) for respondent k = 1,K. Best-in starts by finding the product profile that has maximal utility uB(1) for respondent 1. Then it goes to respondent 2; if respondent 2's utility for buyer 1's best product is within a user-supplied fraction © of uB(2), then respondent 2's best product is not added to the list; otherwise, it is. As the heuristic proceeds through the list of respondents, all of the products then on the list are checked to see if any are within e of uB(k) for respondent k and the preced- ing rule is applied. Various values of e can be tried, depending on how large one wants the ref- erence set to be. Furthermore, the selection pro- cess is often repeated through randomized order- ings of the respondents. In the present illustration ¢ was set at 0.01, resulting in the selection of 44 reference prod- This computer propram (called DESOP) is briefly illustrated in the Appendix and it Exhibit 1 1 PROD INNOV MANAG 2 Toate 33 ucts.” Hence, for each respondent in the sample, at least one of the 44 reference products has @ utility that is within 1% of that respondent's high- est-utility product in the full Cartesian product set of 20,736. Also, as noted from Exhibit 1 (showing a portion of the program's interaction with the user), each respondent's best product utility is higher than the status quo utility associ- ated with the respondent's most preferred current product: Alpha, Beta, ot Gamma. Thus, all re- spondents are potential candidates for switching to a new product. Preparing the Input File The first algorithm also computes the necessary utilities for each of the reference products that it generates. It should be noted that these are utili- ties for products, rather than attribute levels. In effect, the program generates a 108 by 44 input matrix of respondents by product utilities (identi- fied by the attribute-level coding of Table 1). As stated earlier, for each respondent, at least one of, the 44 products has a utility that is within 1% of his/her best product. Finding the Best Line Extension ‘A second set of heuristics (Green and Krieger 1985) is next employed.* This phase requires two sets of input data: (a) the set of reference product utilities, described above and (b) the set of status quo utilities associated with one’s current prod- uct choice (Alpha, Beta, or Gamma). The pur- pose of the second program is to find the best new product profile to offer (given that Alpha remains in the firm's product line) The second program provides a variety of ways to handle seller returns and costs. For pur- poses of illustration we shall assume that the firm ‘wants to find a single line extension that, together with Alpha, maximizes market share. The pro- gram finds the “*best™ line extension in the sense of maximizing the number of respondents who would find either Alpha or the new product to 7 Nine additional randomized slants were used in the current application: akhough some small satiation was noted across the permutations. 41 of the 44 reference products used here also. peared in at Feast § of the § additional runs + This computer program (alled LINEOP1 is brief illustrated in the Appendix and in Eanibit 2.26 {PROD INNOV MANAG PE. GREEN AND A. M. KRIEGER Hit Welcome to the DESOP program. The purpose of DESOP is to construct a set of candidate products for later evaluation by the LINEOP optimal product line program. The principal input to the DESOP program is ‘a matrix of M respondents’ part worths for each level of a set of attributes, ‘The output of the DESOP program is a matrix of size M by N where N denotes the number of products. generated by DESOP, Each product is a realisation of the part worths that are input to the DESOP program ‘The entries of the M by N matrix are buyer utilities. Do you want more information about DESOP? Type YES for more information and NO otherwise. :NO The program is now ready to perform the cleaning step. Please input the number of respondents in the data file ‘Maximum of 400:108 Input the number of attributes. Maximum of 20:9 Input the number of levels for each attribute separated by a space. Each attribute can have @ minimum of 2 and a maximum of 9 levels. Further, the total number Of levels for all attributes must be less than or equal to 80. 423323462 Give the name of the data file:DESO2.UTL. ‘You now have to input the utility for status quo. IF this is constant across individuals. input a single number Otherwise the uilites must exist on a separate file Each respondent's utility must appear on « sepurate line of the file. Is the status quo utility constant across individuals? Answer YES or NO:NO Give the name of the status quo utility fle:DESO2.QUO_ Here are the results of the cleaning step. ‘Total number of respondents removed: 0 ‘The results of the attribute level incidence Attribute Level Frequency with which itis highest 1 1 cr 2 8 3 29 4 66 Note: totals reflect ties and may exceed total sample size. Exhibit 1. Illustrative Run of DESOP (Herbicide Study) What do you wish to do about attribute 1? If you wish to leave it alone type 1. If you wish to remove a subset of levels type 2. IF you wish to fix it at @ specific level type 3:1 Attribute Level Frequency with which itis highest 1 106 2 8 ‘What do you wish to do about attribute 2? If you wish to leave it alone type I. If you wish to remove a subset of levels type 2. If you wish to fix it at @ specific level type 3:1 Attribute Level Frequency with which iti highest 9 ' 9 2 91 ‘What do you wish to do about attribute 9? If you wish to leave it alone type I. If you wish to remove a subset of levels type 2. IF you wish to fix it at a specific level type 3:1 Do you want to apply the Best Enter YES or NO:YES n heuristic? ‘The program is now ready to proceed with the Best-In heuristic. Please type the file name in which you wish to have the results of this heuristic entered:BEST.UTL Please supply an epsilon value indicating how close the tility of any incumbent product must be relatively to bbe acceptable to respondent I. For example. if the utility of respondent I's best product is 8.763 and epsilon is set at 0.1 then if any product within the set at this point has a uility to respondent I of at least 7.887. then respondent I's best product is not included: ltherwise, itis added to the list Please type the value of epsilon as a decimal fraction:0.01 ‘The results of the Best-In heuristic indicate the following Number of entered products: 44 ‘The output file is shown in the file named BEST.UTL have the highest utility of those offered. (It should be noted that all results have been dis- guised to maintain confidentiality: also the changes in share are much more dramatic than found in the real application.) The Line Extension Run Exhibit 2 shows a portion of the second pro- gram's interaction with the user. As noted, one product (Alpha) is forced into the solution. TheDESIGNING PRODUCT LINE EXTENSIONS Exhibit 1 (continued) First Ten (of 48) Product Profiles Fraragaa2 atirigia2 anririg3si2 anririgiaz pidiiggsar piziiai3?2 anaiigi2? aiaaa2an2 Anatigi22 pidaadia? program then finds the best line extension to add, given the retention of Alpha in the product line: ‘The new line extension’s profile is: Mm, The New product (with Alpha) results in a gain in share from the current level of 43% to a new level of 65%. Customer shifts are as shown in Table 2. As noted from the column of new shares, Al- pha pretty much holds its own; the cannibaliza- tion of Alpha to New is only 3 share points. New picks up a 25% share, in total. Gamma, the stronger current competitor, is the primary loser (a drop in share from 38 to 18) while Beta is not highly vulnerable to the new entrant. The program also produces individual results fon which respondent chooses what product; hence, those who switch to New can be analyzed further with regard to background variables. (The principal finding of this ancillary analysis was that New’ choosers were drawn primarily from the larger growers, who also are large producers of corm.) New 11, 132, Table 2. Customer Shifts—First Run Current shares New shares ae 40% 19 0 8 18 i 100" 10% 1 PROD INNOV MANAG. z toerse 1 ‘Table 3. Customer Shifts—Second Run Current shares New shares Alpha 43% om Beta 19 0 Gamma 38 16 New 1 0 2 New 2 _o a6 100% 100% Replacement of Alpha The second computer program can also be used to help answer related questions of competitive strategy. For example, suppose Alpha were with- drawn from the market and replaced by two new products: New J and New 2. How should these new products be designed and what would be the resulting share for the firm? In this case, we need to modify the status quo utilities for all current Alpha buyers. Each of these is replaced by the utility for each Alpha buyer's second choice brand (either Bera or Gamma) to reflect the fact that Alpha is no longer available, The program is then requested to find the best two-product bundle (in the sense of max- imizing market share) for the firm, given only two current competitors: Bera and Gamma Under these conditions, the program produced the best pair of products, with profiles New I 311, 111, 132 New 2 41, 113, 232 The effect of this strategy on the firm's market share is shown in Table 3. ‘As noted, the gain from this new strategy is modest, when compared to the case of keeping Alpha and introducing New, the single line exten- sion. Gamma loses slightly more under the sec- ond (replacement) strategy but the overall share for the firm is only two points higher than that associated with the line extension strategy. A Two-Product Line Extension We could, of course, consider the possibility: of introducing two new line extensions. in addition to keeping Alpha in the line. No new principles are involved: the program simply seeks the best pair of new products given the maintenance of Alpha in the line1 PROD INNOV MANAG: PE. GREEN AND A.M. KRIEGER. Exhibit 2, Ilustrative Run of LINEOP (Herbicide Study) LINEOP IS AN INTERACTIVE PRODUCT LINE OPTIMIZATION PROGRAM. LINEOP USES A VARIETY OF COMBINATORIAL METHODS AND HEURISTICS TO FIND THE OPTIMAL PRODUCT LINE. DO YOU WANT MORE INFORMATION? :NO WHICH OPTION DO YOU WANT TO USE? TYPE X FOR THE BUYER'S WELFARE OPTION. ‘TYPE Y FOR THE SELLER'S PRODUCT LINE OPTION. ny WOULD YOU LIKE A DETAILED DESCRIPTION OF THE INPUT DATA REQUIREMENTS? NO. INPUT THE NUMBER OF RESPONDENTS IN THE DATA SET. MAXIMUM OF 400: 108 INPUT THE NUMBER OF CANDIDATE PRODUCTS IN THE DATA SET MAXIMUM OF 64:44 GIVE THE NUMBER OF THE BUYER UTILITY DATA FILE:BEST.UTL YOU NOW HAVE TO INPUT THE STATUS QUO UTILITY FOR THE BUYERS. YOU HAVE TWO OPTIONS TO INPUT THESE DATA. TYPE X IF THE STATUS QUO UTILITIES ARE THE SAME FOR ALL THE BUYERS. TYPE Y IF STATUS QUO UTILITIES ARE NOT THE SAME FOR ALL THE BUYERS. IF YOU TYPE Y THE DATA MUST EXIST ON A SEPARATE FILE. ONE LINE PER RESPONDENT. Y GIVE THE NAME OF THE FILE CONTAINING THE STATUS QUO UTILITIES:DESO?.QUO ‘THIS CAN BE INPUT IN THREE ALTERNATIVE WAYS. IF THE RETURN IS THE SAME FOR ALL BUYERS AND PRODUCTS. TYPE X. IF THE RETURNS DEPEND ONLY ON THE PRODUCT AND NOT ON THE BUYER. TYPE Y. IF THE RETURNS DEPEND ON THE BUYER AS WELL AS THE PRODUCT. TYPE Z. IF YOU TYPE Y OR Z. THE DATA MUST EXIST ON A SEPARATE FILE. IN THE CASE OF DATA TYPE Y. EACH RETURN APPEARS ON A SEPARATE LINE, IN THE CASE OF DATA TYPE Z. THE SAME FORMAT USED TO INPUT BUYERS’ UTILITIES IS FOLLOWED. x INPUT THE VALUE OF THE CONSTANT. RETURN:1.0 INPUT THE STATUS QUO RETURN OF THE SELLER.0 GIVE THE SIZE OF THE PRODUCT SET TO BE OPTIMIZED SHOULD NOT EXCEED 30:2 GIVE THE SIZE OF THE PRODUCT SET TO WHICH ANY COMPLETE ENUMERATION WILL BE RESTRICTED. THIS SHOULD BE AT LEAST AS LARGE AS THE SIZE OF THE OPTIMUM PRODUCT SET INPUT ABOVE BUT SHOULD NOT EXCEED 3:10 ARE THERE ANY CANDIDATE PRODUCTS YOU WISH TO FORCE INTO THE SOLUTION? IF YES TYPE | ELSE TYPE 0:1 HOW MANY PRODUCTS DO YOU WISH TO FORCE INTO THE SOLUTION? THIS NUMBER MUST BE AT LEAST ONE LESS THAN THE NUMBER OF PRODUCTS REQUIRED IN THE OPTIMAL SET:1 INPUT THE PRODUCT IDENTIFYING NUMBERS (COLUMN NUMBERS) WITH EACH NUMBER ‘SEPARATED BY A SPACE. IF MORE THAN IS PRODUCTS ARE TO BE FORCED IN. INPUT THE FIRST 1S NUMBERS ON THE FIRST LINE, HIT CARRIAGE RETURN, AND THEN INPUT THE REMAINING NUMBERS ON THE NEXT LINE. DO NOT INPUT THE SAME NUMBER MORE THAN, ONCE, ARE THERE ANY CANDIDATE PRODUCTS YOU WISH TO FORCE OUT OF THE SOLUTION? IF YES TYPE | ELSE TYPE 0:0 ARE THERE ANY USER-SPECIFIED BUNDLES. OF THE SAME SIZE AS THE OPTIMAL BUNDLE WHICH YOU WISH TO EVALUATE? UP TO. ‘THREE SUCH BUNDLES CAN BE ENTERED IN ANY SINGLE RUN OF THE PROGRAM. ENTER 0.1.2 OR 3 TO INDICATE THE NUMBER OF BUNDLES YOU WISH TO EVALUATE: ARE YOU INCLUDING CLASSIFICATION DATA FOR RESPONDENTS? IF YES TYPE 1, ELSE TYPE 00 GIVE THE NAME OF THE FILE IN WHICH YOU WISH TO STORE THE OUTPUT FOR EACH RESPONDENT:BEST.TMP_DESIGNING PRODUCT LINE EXTENSIONS 41. PROD INNOV MANAG. tsar Exhibit 2 (continued) YOU NOW HAVE TO INDICATE THE HEURISTICS YOU WISH TO USE. ‘THE INPUT FOR EACH HEURISTIC SHOULD BE A | IF YOU WISH TO USE IT AND ZERO OTHERWISE, THE OPTIONS ARE: 1, BUYER'S GREEDY WHERE Ud) 14.0) OR VI) 2. MODIFIED BUYER'S GREEDY WHERE U(1J)=0 OR | 3. SELLER'S GREEDY 4, COMPLETE ENUMERATION ON THE L HIGHEST RETURN CANDIDATES ‘THIS IS AN OUTPUT OF THE LINEOP PROGRAM NUMBER OF RESPONDENTS NUMBER OF CANDIDATE PRODUCTS. MAXIMUM SIZE OF OPTIMAL BUNDLE SIZE OF ENUMERATION SET& PRODUCT LD. NUMBERS OF FORCED IN PRODUCTS: HEURISTIC 1; MODIFIED BUYER'S GREEDY WHERE U(.I)=VU.0) OR VJ) PRODUCTS: 2 10 HEURISTIC 4: COMPLETE SUBSET ENUMERATION PRODUCTS: 2 10 Individual Setections—First 20 Respondents (No. 4S is Status Quo Product) RESPONDENT NO. PRODUCT CHOICE _UTLTY AS % OF BEST CHOICE 1 2 871 2 2 100.0 3 2 100.0 4 2 100.0 5 2 977 6 2 96.8 7 10 93.2 8 2 948 9 10 98.9 0 2 100.0 ui 45 5 ie 0 ona 5 4s oS 4 10 100.0 Is 0 94.3 16 2 100.0 0 3 100.0 1s 2 100.0 ny 2 94,2 2» 4 wo20 {PROD INNOV MANAG. Current shares New shares Alpha 3% 36% Bera 19 7 Gamma 38 0 New 0 9 New3 0 n 100% 100% Interestingly enough, in this program run, one of the two new products is the same product that entered in the single line extension case New 111, 111, 132 while the other is New 3 311, 121, 161 In this case, the share changes are as shown in Table 4. When one compares this result to the single line extension case, little appears to be gained by introducing a second product. The sec- ond line extension (New 3) not only cannibalizes Alpha but cannibalizes New, as well. Of course, other strategies can be tried out and evaluated for their impact on the firm’s market share. Moreover, the user could embellish the problem to take differential product retums and respondent importances into account. These op- tions are all feasible if various program inputs are suitably modified. Concluding Comments The design of optimal products and optimal lines of products has received increased attention over the past few years. The earliest efforts focused on single product optimization and utilized MDS methods [1-3, 8, 10, 13-15, 20]. Conjoint analy- sis has also been applied to the problem [5, 21] Itis not surprising that extensions of the single product case to optimal product line design have also appeared [6, 11, 16, 19]. The methodology applied here is in this same spirit. While the heu- ristics used in the two computer programs cannot guarantee “optimal” product lines, in most cases of practical interest. they should perform quite well. (This has been checked by various synthetic data analyses in which the optimum has been known in advance.) PE GREEN AND A.M, KRIEGER The present paper has adapted the product line methodology to the common problem of line ex- tensions, where a firm’s current products are aug- mented by one or more new products. This type of application requires little in the way of pro- gram modification, given the second program's option to force one or more prespecified products into the solution. Some Caveats As the reader would no doubt surmise, there is usually a wide gulf between a case exposition (as presented here) and the difficulties that character- ize real-world problems. Some of the prob- lems that apply to the proposed approach (and probably would apply to other methods at this stage of algorithmic development) are listed below. 1. In conjoint analysis, the selection of attributes (and their levels) is a critical and difficult step. A number of important influences on brand selection (e.g., advertising theme, distribu- tion) are not readily amenable to the tech- nique. At best, the conjoint profile is a limited description of the actual offering, 2. In real problems there are always time lags between product design and implementation; in the interim, consumer tastes could change and/or the actual product may not be able to deliver the attribute levels employed in the original research. 3. It is naive to assume that competitors will sit idly by when line extensions (particularly suc- cessful ones) are introduced. While some promising research is currently going on in the area of competitive retaliation [9]. the fact re- mains that the modeling of competitive actions and counteractions is extremely difficult in in- dustry-level contexts 4. While the case illustration assumed that the attribute level list of Table 1 was “given,” in reality the construction of the master design of attributes and levels can entail much time and heated debate. Focus groups, trade inter views, and structured questionnaires are some of the steps that may be taken to elicit the “determinant” attributes. Still, itis always the case that the conjoint profiles are limited de- scriptions of the real thing.DESIGNING PRODUCT L'NE EXTENSIONS. In sum, the proposed approach provides, at best, a crude approximation to the much more detailed and complex states of affairs that characterize real situations. Like all models, the question is whether the model provides a useful and opera- tionally tractable representation of the phenome- non being represented. Future Research ‘As described at the beginning of the paper, the incorporation of line extension costs, profit con- tributions, and competitive reactions is essential to a more complete representation of the prob- Jem. The second algorithm (dealing with product line selection) can incorporate differential returns to the seller, by either product or by buyer-prod- uct combination. The first algorithm (dealing with reference set selection) will be modified in the future to accept attribute level costs/returns in addition to the respondent part worths that are currently present. Extension of the general approach to incorpo- rate competitive retaliation is a considerably more difficult problem. As pointed out above, models can be developed to cope with the selec tion of “optimal” line extensions, given a limited number of competitive countermoves, but it is very difficult to capture the full interplay associ- ated with a prolonged sequence of competitive moves and countermoves. The problem is exac- erbated by the need to consider possible changes in consumers’ utilities over a longer planning ho- rizon than assumed here. As in all conjoint appli- cations, external (i.e. field-level) validation is a major and difficult-to-implement task. We have tried to show, in a nontechnical way, how tradeoff data, collected in the normal course of conducting a conjoint study, can be further processed by the heuristics proposed here. Much additional work needs to be done on the evalua- tion of this methodology. from both technical and empirical standpoints. In particular, more experi- ence is needed on its applicability to real-world strategic problems. both in line extending and new product line development. Given the still- primitive state-of-the-art of these techniques, we can expect further developments as other re- searchers prepare and test new models in this problem area. PROD INNOV MANAG: a Iwate Appendix ‘Two technical papers [7, 6] describe the essential characteristics of DESOP and LINEOP, respec- tively. Our present discussion is nontechnical and relates to the illustrative runs of Exhibits 1 and 2. DESOP Exhibit 1 describes the program-user interaction in employing DESOP to prepare a set of "good reference products for later input to LINEOP. ‘The principal input to DESOP is a 108 x 29 ma- trix of respondent by attribute-level part worths (there are 29 levels in the attributes listed in Table 1). In addition, DESOP accepts an input file of status quo utilities, one for each respondent. In this example, the status quo refers to the brand (Alpha, Beta, or Gamma) that exhibits the re- spondent’s highest likelihood of purchase during the next planting season (in the absence of any new offering). ‘As shown in Exhibit 1, DESOP first provides summary descriptive data regarding the fre- quency with which each attribute displays the highest part worth. The user is free to fix attrib- utes at specified levels or remove specific levels (e.g., those with zero frequencies). Moreover, re- spondents can be removed if the utility associated with their best possible product is still less than the status quo utility (i.e., purchase likelihood). In the current application, no respondents nor at- tribute levels were modified. The program then proceeds to the application of each of four heuristics [7]. In the present appli- cation, only best-in was selected. DESOP pro- duces a large output file (not shown) of respon- dents by product utilities for subsequent input 10 LINEOP. Exhibit 1 shows a portion of the “best” product profiles, also produced by DE: SOP. LINEOP Exhibit 2 describes the program-user interaction, in the application of LINEOP to input data pro- vided by DESOP. The principal input to LINEOP is a 108 by 44 matrix of respondent by product utilities and a 108 by 1 input vector of status quo utilities, In the sample run of Exhibit 2, LINEOP was instructed to find the product (out of 44).2 {PROD INNOV MANAG. teri? conditioned on Alpha remaining in the line, that maximizes share of choices (across two items). In each case the respondent compares New and Al- pha to status quo. If both exceed the status quo utility, the respondent is assumed to choose the one with the higher utility. LINEOP provides four heuristics for selecting ‘optimal products [6]. In this example, all four heuristics produced the same results, namely New (product 10) and Alpha (product 2); the lat- ter product, of course, was forced in. As noted from Exhibit 2, we chose a seller's return of 1.0 if'a new product is selected and zero if status quo is chosen. This is tantamount to maximizing share of market. We also indicated that in the fourth heuristic (complete enumeration of the L highest return candidates) L. was set at 10. Also shown are the individual respondent se- lections for the first 20 individuals. As noted, product 45 represents the status quo. The last column indicates the percent of each respon- dent's utility for his/her highest-utility product that the actual selection (New, Alpha, Beta, or Gamma) represents. As observed, the percent- ages are high, indicating satisfaction with the competitive array’ References 1. Albers, $-and BrockhofT.K. A procedure for new product pos tioning in an atinbute space. European Journal of Operational Research 1:230-238 (ly 1977) 2, Bachem, A. ané Simon, H. A product positioning model with (costs and prices. European Journal of Operational Research 7362-370 (August 1981) 3. Gavish, B., Horsky, D., and Srikanth, K_ An approach to the optimal positioning of 4 new product. Monagement Science 35:1277-1297 (November 1983) 4. Green, P.E. 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