You are walking along the dairy aisle, picking up Yoplait yogurts. You prefer the 99% fat free version, so you load up on some strawberry, some raspberry and some vanilla. The price? All of them priced exactly the same, 59 cents. (Let us ignore the one time promotions they run on one flavor to clear out the stock). After picking a dozen or so 99% fat free version you look up and find Yoplait Whips and it also has almost the same line up of flavors. Price? 79 cents.
- Why does the price vary across the types of Yogurt (let us call this vertical product line) but not across the flavors within a product line?
- Does it cost the manufacturer the same to make raspberry and strawberry yogurt? Should the cost difference be reflected in pricing?
- Do customers value the different flavors differently?
- Why does the price vary across product lines?
- Does a marketer stand to gain more profit by doing vertical line extension or by increasing variety within a product line?
- Can the marketer increase market share by increasing variety within product lines?
In their paper published in Marketing Science( Spring 2006, Vol. 25 Issue 2, p164-174) Stanford GSB professor Michaela Draganska and Kelloggs’ Dipak Jain asked just these questions and found the answers for the rest of us marketers.
We find that consumers value line attributes more than flavor attributes. Given that consumers value line attributes more than flavor attributes, firms have a lot to gain by pricing their product lines differently whereas they have little to lose from pricing all flavors within a line the same. We also find that the value of a product line is not merely a function of the number of flavors it includes: The calculated inclusive values indicate that more flavors do not always result in increased utility for consumers and hence higher market shares.
Firms’ profits would not significantly increase if they were to price flavors within a product line differently. Therefore, the current pricing policy of setting different prices for product lines but uniform prices for all flavors within a line appears to be on target.
What does this mean to marketers? This tells what true versioning means, it is not just changing colors or toppings. Do not chase market share by making minor tweaks, this does not result in profit increase. Strategy is about making choices. When in doubt about where to invest your R&D and marketing dollars, instead of expanding variety within a product line (horizontal versioning) go for product line extensions (vertical versioning).