The challenges of a product line extension include:
- Potential product cannibalization
- Minor increases in sales volume
- Cluttering or confusing the market
- Less efficiency of production and marketing
- Unresponsive retail channels
Potential product cannibalization
Probably the main concern with a product line extension, particularly for a simple variation of an existing brand/product – such as a flavor or size variation – is cannibalization of existing sales.
That means that the sales generated by the new products are at the expense of existing products that are already marketed by the company. Therefore, the firm is working harder but is not achieving an increase in sales or profitability.
Minor increases in sales volume
Similar to the cannibalization issue, the product line extension may only generate a very minor increase in sales. This is because the company already produces similar products, or products in the same category, and is not bringing anything significantly new to the marketplace in many cases. As a consequence, only minor sales increases should be expected.
Cluttering or confusing the market
If the company produces a product line extension under an existing brand – such as another variety of Kellogg’s Corn Flakes – there is always a danger that an increased product mix may become confusing to the market, particularly when there are many variations on a supermarket shelf.
Another example of this could be a bank that offers dozens of variations of a credit card, which may make some consumers reluctant to approach the bank and apply for a credit card because they do not understand the differences between the offerings.
Less efficiency of production and marketing
Another challenge of a product line extension is that the firm is now producing a wider variety of products. This naturally implies that the organization as more products to produce, store, transport, market and support. As the company diversifies and expands its product line it is possible that it may become less efficient.
Compare this approach to Apple, which runs a very limited and restricted product line in order to achieve production and marketing efficiencies.
Unresponsive retail channels
There is no guarantee that even established retailers will respond well to a product line extension. Retailers have their own business goals and their own mix of merchandise that they aggregate the benefit of their own target markets.
In many cases, a product line extension, particularly a simple one, may not appeal to the retailer. They may not perceive the additional benefits in offering a similar style product. In reality they are more likely to experience sales cannibalization, whereas at least a manufacturer can win extra sales from a competitor.