Accounting Accidentally: A Product Innovation that Reduced Overall Product Sales

Innovation generally increases sales of a given product category. The product improvement creates more customer satisfaction- and drives more sales. Mobile devices are a great example. Innovation allows manufacturers to add more features to mobile devices all the time. The user can take better pictures, access websites faster, play music with more clarity. As a result, the product is used more- and customers are willing to upgrade. If there is more demand, the manufacturer can increase the price- all good stuff!

A recent article explained a product innovation that has reduced overall product sales- detergent sales (“Is Innovation Killing Soap Sales?”, Wall Street Journal, 4/4/13).

Proctor and Gamble’s innovation was to create premeasured pods for laundry detergent. No need for the customer to measure the powder or liquid in a measuring cup. The shift to pods (which is increasing) has reduced overall sales of detergent. Why? Customers pour too much liquid or powder into every load. Consider these issues:

· Customers who buy liquid detergent the large sizes didn’t “feel guilty” about overusing the product because they paid a quantity discount.
· Companies now market more highly concentrated liquids and powders. The more concentrated the product, the more careful the customer must be to avoid waste. In other words, the buyer must be more careful about measuring the concentrated product.

The pod innovation has reduced product waste- and customers are buying less product.

There is another trend working against powder and liquid detergents. More customers are using high-efficiency washing machines “which clean with relatively little detergent”.

One last trend: the profit margin on the pod detergent is currently lower than on liquid or powder. That’s because the wholesale price for the pod detergent is high. The retailer doesn’t want to add a large markup, because they risk losing pod sales to low priced competitors. So, the product that people are moving toward- pod sales- is less profitable!

So, how can a seller maintain a reasonable profit level? Well, raising prices doesn’t seem to be an option- for the reasons mentioned above. If you want to “widen” the difference between costs and your sale price, if can’t change the sale price part of the equation.

The solution must be on the cost side. As times goes on, maybe the manufacturer can reduce the production costs for the pods. That might mean that material costs decrease, as the producer buys larger quantities. Or, maybe the manufacturer finds ways to reduce machine and labor costs- they learn how to produce the product faster, more efficiently.

This is a great cautionary tale: innovation is great for consumers- but how will it impact your firm’s profitability?

Click here to learn about my subscriber-only monthly newsletter:

http://stltest.net/newsletter--subscriber-only-content.html

Thanks!

Ken Boyd

St. Louis Test Preparation

(cell) (314) 913-6529

(email) ken@stltest.net

(website) www.stltest.net

(you tube channel) kenboydstl

(blog) http://accountingaccidentally.blogspot.com/

(facebook-2 pages) St Louis Test Prep and Cost Accounting for Dummies