What is a Product Line?
A product line refers to an array of related products under the same brand. In other words, a product line is a collection of similar products that are sold to customers.
- A product line is an array of related products.
- Products under a product line can be related by functionality, target market, price range, or brand.
- Product line depth refers to the number of products offered under a product line.
Understanding Product Lines
Products under a product line are related either by functionality, target market, price range, or brand. Although products in a product line are generally complementary to each other, that does not need to be the case. For example, the product lines of a company may look as follows:
As shown above, ABC Company carries two product lines:
- Product Line 1 consists of products that are fruit-based; and
- Product Line 2 consists of products for sports activities.
Product Line Depth
When discussing product lines, it is important to understand the idea of “product line depth.” It refers to the number of products offered under a product line.
For a product line, there is no ideal number for product line depth – a product line may consist of a depth of five or nine and still be successful. However, maintaining a depth that is too low can affect the availability of choices for customers, while keeping a depth that is too high can dilute the brand perception of the product line and cannibalize sales. For example, consider two scenarios:
1. Low Depth
A company may keep a fruit-based product line depth of two (two products under a product line) consisting of a mango drink and a strawberry drink. A customer that prefers a grape drink may not be a customer of the company due to the unavailability of such a product. It would limit the addressable target market of the company and diminish sales.
2. High Depth
A company may keep a fruit-based product line depth of five (five products under a product line) consisting of a mango drink, a strawberry drink, a guava drink, a grape drink, and a watermelon drink. Keeping such an array of products may adversely impact a company if one product is unpopular. For example, if it cost $100,000 to conduct research and development for a watermelon drink but sales only amount to $5,000.
Therefore, there is a careful balance between the number of products that should be offered in a product line. The ideal number of products to offer in a product line can be determined by conducting market research.
To Add or Drop a Product Line?
Managerial accountants often conduct analyses on product lines to determine if they should be dropped or not. Consider an auto manufacturer with the following profit and loss statement:
Assume that both sedans and coupes are produced in the same facility and, as such, rent expense is allocated based on the amount of square footage used in the production of the respective product lines. Should the sedan product line be dropped?
Looking at the bottom line (profit), an individual may assume that the sedans product line should be dropped due to the -$30,000 in profit. However, in such cases, an individual should instead compare the contribution margin to the avoidable fixed costs. For example, the sedans product line shows a contribution margin of $570,000, and the fixed costs that could be saved if the product line is to be discontinued are salaries of $400,000.
Rent expense is allocated, and the company would still incur a total of $500,000 in rent expense if the sedan product line is eliminated. The following illustrates the profit of the company if the sedans product line is eliminated:
Therefore, a decision to add or drop a product line should be based on the contribution margin and avoidable fixed costs. If the company dropped the sedans product line, the company would lose $177,000 in total profits.
Examples of Product Lines
When an individual goes into a Starbucks (NASDAQ: SBUX) shop, they are exposed to several product lines offered by the company. For example, Starbucks may have product lines such as coffee, tea, and snacks.
At a Nike (NYSE: NKE) store, product lines may consist of basketball, soccer, and golf. Under each sport product line, there may be sub-product lines, such as footwear, clothing, and sporting equipment.
Thank you for reading CFI’s guide to Product Line. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: