Sales and Distribution — Right Assortment

Conventional wisdom suggests that consumers prefer greater variety. This is relevant especially within the realms of a physical brick and mortar world where shelf space is finite and limited.

Yet sometimes consumers are overwhelmed by the profusion of choices that confront them. They may appreciate a wide selection of movies, songs, books, breads and soups, and juices. But do they need to choose from 20 different brands of pineapple juice?

In a natural experiment using data from nearly 800,000 respondents, Sheena Iyengar concluded that participation rates for a retirement savings plan fall as the number of fund options increase (Iyengar et al., 2004). The team’s results confirmed that participation in the retirement savings plans is higher in plans offering a few funds, as compared to plans offering ten or more options.

In another study on the benefits and detriments of variety, Vries-van Ketel (2005) concluded that “an optimal level of assortment size seems to exist for simple grocery products … more variety is more appealing to consumers, but that variety also has its limits.”  Based on her empirical findings, consumers find it harder to cope with variety in assortments of complex products. For these products, optimal assortment level is lower than that for simpler products.

For instance, the task of purchasing a digital camera is complex because it entails the understanding and trade-off of a large number of attributes, some of which an average buyer might not fully comprehend. In this case great variety becomes a burden for consumers confronted with the difficult task of selecting a complex product.

There also exists in people’s mind, the fear for later regret (buyer remorse), i.e., what if I choose the wrong product? The potential for regret is greater for products that are complex and long lasting, and it increases with increase in choice.

Expertise of the buyer too has a bearing on her preference for variety. Experts are able to better cope with the complexity of choice. They presumably are more inclined to learn about the product and prefer a wider selection so that they may choose exactly what they want.

Vries-van Ketel’s study also stresses the importance of merchandising. Her research suggests that products should be placed on the shelves in an organized manner, so that consumers find it easier to choose what they want. This reduces the “cost” of variety to consumers.

As regards costs, from the manufacturer’s perspective, adding brands and variants reduces the economy of scale per item, heightening manufacturing, marketing, sales, logistics and inventory costs.

From the retailer’s perspective too, greater variety translates to higher costs. The expansion of assortment and consequently the decrease in turnover per item (turns) negatively impacts inventory, delivery, merchandising, administration and purchasing costs.

Note, however, that although certain research studies have indicated that an excessive amount of choice can be unfavourable, the majority of sectors and product categories find themselves operating well below the optimal assortment levels. Physical limitations such as finite shelf space pose significant constraints. Therefore, the majority of research studies have concluded that expanding assortment tends to increase store traffic and overall spending levels.

In view of this, the challenges confronting retailers in most consumer goods industries are as follows:

  • Limited shelf space: Retailers struggle to accommodate the extensive array of brands and products offered by suppliers due to constraints in available shelf space.
  • Consumers want more variety. Currently, the assortment levels in most categories are significantly below the optimal threshold.
  • Stock availability: Consumers expect products to remain in-stock. Retailers must ensure that products are adequately stocked on shelves to minimize the occurrence of out-of-stock situations.

To address these challenges, the limited shelf space that is available in a store must be optimized so that consumers may benefit from a wide range of choices, with minimum incidence of stockouts. 

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