Product proliferation, cannibalisation, and substitution: a first look into entailed risk and complexity

Product proliferation has been adopted to increase sales introducing variants that may lure new customers, thus expanding the companies' reference market and potentially increasing the overall profit. However, extending the product-portfolio may imply product cannibalisation, increased costs, unproductive variety, and value-destroying complexity. In this paper, we develop a newsvendor-based model to analyse profitability, sales revenue, costs, and market share considering product proliferation and related market expansion, cannibalisation, and demand substitution effects. We propose a heuristic approach and a model aiming at defining the size of the portfolio and the quantities to be purchased (or produced) for each variant when facing a stochastic demand in terms of demand magnitude and variability, demand arrivals, demand substitution, and customers’ preference. The proposed approach does not use simulation to account for the dynamic of the demand: instead, it uses a probability distribution approximation and an iterative algorithm to define the optimal quantities for each variant candidate to enter the portfolio. We provide the results of numerical experiments and discuss the emerging insights.