These days, the typical US supermarket’s shelves strain to hold between 30,000 and 50,000 unique products, up from about 15,000 in 1991. Yet roughly a quarter of those products sell less than one unit per month.
Similar product proliferation trends are evident everywhere, from car manufacturing to the food industry. However, as more products are created, per-unit revenues (and associated profitability) can drop: One sports drink maker increased its number of flavors three-fold but saw sales per flavor decline nearly 60 percent due to massive cannibalization.
A differentiated product strategy can pay big dividends if companies have the right analytics in place to truly understand profitability. But many firms struggle to achieve this level of transparency. In the mad global dash to be everywhere, all the time, companies often lack the analytical horsepower to determine which products actually make money, and that can be a huge downdraft on shareholder value (see chart).
Make no mistake: Complexity is here to stay—no one is going back to the Ford Model T era of a universal product—and for good reason. At its core, complexity fosters growth, and that’s part of its seductive power. Making more products attuned to the needs of more customer segments generates growth. Problems can occur, however, when companies lose control of product complexity, which in today’s fast-moving, global, competitive environment has become an all-too-common occurrence.
One proven way leaders can cut through complexity’s knottier issues is to use a six-step product complexity management framework, which systematically establishes a product’s “true profitability.” The framework’s power comes from its intense focus on identifying which products to keep and then improving the profitability of those products. Deeper analyses at the product and component levels enable the organization to identify, evaluate and measure product complexity and the potential for improvement. The framework also examines a company’s sales efforts and ultimately helps companies develop and sustain truly profitable products.