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 employees, 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 handful of 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 learning more about the product, and prefer large assortments 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 increase in assortment and consequently the reduction in turns per item, adversely affects inventory, delivery, merchandising, administration and purchasing costs.

It is important to stress that while some research studies have shown too much choice is not good, in majority of sectors and product categories, retailers are well below the optimum levels of assortment. Rather than too much choice, physical constraints such as finite shelf space are the prime limitations. Thus, the majority of research studies have concluded that increasing assortment will increase store traffic as well as spend levels.

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

  • Shelf space is limited — retailers are unable to accommodate the wide selection of brands and products offered by suppliers.
  • Consumers want more variety. (Though there are upper limits, current levels of assortment, for most categories, are far below these levels.)
  • Consumers expect products to remain in-stock. Retailers need to ensure that products are stocked on shelves in adequate quantities, so that they are unlikely to run out-of-stock.

The limited shelf space that is available in a store must be optimized so that consumer may benefit from a wide range of choices, with minimum incidence of stockouts. 

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