The mathematics of line extension.

December 1, 2003

December 2003

Every company wants to increase sales. So the logical approach is to “broaden the line.” If we appeal to a larger segment of the market, goes the thinking, we can’t help bu

t move more merchandise.

What seems obvious in theory cannot be true for the market as a whole . . . if you analyze the market mathematically.

Take a typical example, beer. Years ago, three major brands dominated the American market: Budweiser, Miller and Coors. Today, each of the three major brands has metamorphosed into a family of brands, as each brewery broadened its line to appeal to a larger segment of the market. So now we have regular, light, dry, draft, reserve and a number of other variations on each of the basic brands.

Why the raft of beer line extensions? To increase sales, of course.

What might be true for one brewery is obviously not true for the beer industry as a whole. No matter how many line extensions each brewery introduces, the average market share of the average brewery will remain exactly the same. The only difference (and it’s a big difference) are the extra expenses of all those additional brands. Advertising, packaging, sales promotion, etc.

Line extensions also increase the costs of distribution without providing any increases in overall sales of the category. They also increase the possibility of a given “flavor” being out of stock. In this respect, line extensions can actually reduce sales of a given category.

Whether line extension is good for one particular brewery or not might be a matter of discussion.  But what isn’t a matter of discussion is that line extension is mathematically bad for the beer industry as a whole.

The case could be made that line extensions broaden the entire beer market. More people drink more beer because they now have more choices. It’s not true of the beer business, of course, because per-capita beer consumption has been essentially flat for the last 25 years.

But even if line extensions did increase total beer sales, the mathematics would not favor line extensions for the economy as a whole.

If beer sales did increase, some other product category would have to decrease. So the average sales of the average industry would remain exactly the same. The only difference would be the extra expenses of all those line extensions.

It’s like casino gambling in Los Vegas. Sure, there might be some winners, but on average, the average player is a loser.

Even if line extension in total is a loser, maybe the “first mover” can gain an advantage. Our research shows just the opposite. It’s usually the “last mover” that wins a line extension war.

Miller was the first line-extension mover in the beer wars. (Miller Lite, an enormous initial success, started the industry down the line extension path.) Yet Miller Brewing has been hurt the most in recent years. It was Budweiser, the last mover in the beer line-extension war, that has increased its market share dramatically.

We are branding people, so our interest in line extension is not in the mathematics. Rather, we are concerned about the clarity of brands. Line extension often destroys what a brand stands for.

Budweiser used to be The King of Beers. Coors was the beer brewed with Rocky Mountain spring water. And Miller was the brand you drank after a hard day’s work. “It’s Miller time.”

Today, these three brand positions are mostly meaningless, buried under an avalanche of line extensions.