Demand Modeling in Product Line Trimming: Substitutability and Variability (original) (raw)

International Series in Quantitative Marketing

Abstract

The number of products or stock keeping units (SKUs) in most product categories has been growing at a phenomenal rate. Even though the number of products increases, the average sale of products can decrease. Due to cannibalization, the sales of some products may even drop below a threshold that makes them unprofitable. This has spurred some firms to remove these under-performing products from their product lines. This ad-hoc “trim the lame duck” procedure can have an adverse effect on the firm’s profit for two reasons: first, the “lame duck” may not be the most substitutable product within the line, trimming it results in higher lost sales; second, the “lame duck” may be cheaper to keep with lower inventory cost due to less variability in sales. As an initial step to developing a better product elimination procedure, we use a model that explicitly captures product substitution phenomenon to examine various product portfolios. We compare the mean and the variance of the sales associated with two basic strategies: trimming and no trimming. Our results provide insight into when and which products could be trimmed.

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