Written by Nick Voulis, Head of Research Solutions.
The concept of ‘SKU rationalisation’, where brands and retailers trim their product/ service ranges whilst seeking to maintain – or ideally increase – their sales, is already an established practice. Blue chip companies such as Coca-Cola, Heineken, and Morrisons are all engaged in ‘product pruning’. COVID-19 has only served to accelerate range reduction, driven by supply side shortages and financial pressure on businesses.
Why? There are three key reasons. First, due to ‘shelf squeeze’ – there is fierce competition for physical space in stores and distribution channels. Second, because in most categories 80% of sales will be generated by 20% of a range (the rest is a costly drain on resources). Third, duplication exists – consumers will mostly be able to find an acceptable alternative when a variant is withdrawn. But there is critical fourth reason why a business chooses to reduce its range, and that is financial gain. Not only do businesses cut cost through range reduction, a (cross-category, cross-country) study by Bain & Co. showed that a reduction in SKUs resulted in a corresponding growth in revenue – a strategy of ‘growth through simplicity’ as expressed by Bain.
So ample evidence exists of how business benefits from range optimisation, but what about the consumer? At face value it would be reasonable to assume that less choice would be bad for buyers. But Schwartz’s ‘The Paradox of Choice’ argues that consumers can also benefit from simplified product ranges, especially when purchasing routine or habitual items. The provision of more options actually serves to make consumers feel worse about, and less satisfied with, their eventual choice. COVID-19 has also served to condition consumers to restricted choice in some categories, as well as shifting even more of their shopping online. The pandemic presents a problem for brands seeking to understand their target audience. Historical data is no longer a reliable indicator of future behaviour. Disruptions of this magnitude require new research that explores how people will behave now and in the future, and the implications for which products a business should support, and which could be sacrificed. Get in touch to find out how you can approach range optimisation to benefit your brand as well as your consumers.