Consistently combining cost efficiency with consumer value is a challenge many companies spend years trying to get right. Some take an active stance that too often becomes undisciplined: without a clear governing structure, a siloed approach to innovation and product management results in constant reinvention and multiplying initiatives. At the other extreme are those businesses that do too little with their portfolios, perhaps unsure of the right steps and ending up with a growing tail of low- (or even negative-) margin products—or simply tiptoeing around important design choices in heritage brands. Both approaches typically generate too much complexity in a product portfolio for too little in return.
Portfolio optimization was a focus even before pandemic-driven uncertainties took hold, as rapid changes in consumer preferences—along with a transformed retail and competitor landscape—triggered an increasing need for simplification. Forward-looking companies that seek to keep pace with consumer expectations are becoming more intentional in identifying points of differentiation, even while meeting stronger productivity imperatives and increased cost pressures. Portfolios that are aligned with (and optimized for) consumer value drivers can help companies get a head start in the recovery period and remain competitive.
When complexity is good, it is targeted, manageable, and linked directly to value creation. When complexity is bad, it creates unwarranted cost, fragmentation, and consumer confusion. The balance lies in understanding how to design the right kind of complexity into a product portfolio while eliminating the wrong kind.
In doing so, brands have an opportunity to give consumers exactly what they want at the right price—with bottom- and top-line impact. At a major beauty company, a portfolio-performance program improved margins and reduced costs by more than 10 percent across about half of the company’s cost base. A beverage company achieved similar cost reductions and increased its speed to market. And a food company successfully expanded margins in a highly competitive subsector while reducing inventory and increasing manufacturing capacity.
Linking marketing and operations priorities for fast impact
At its core, managing portfolio complexity is matter of finding the most cost-efficient way of meeting consumers’ expectations in generating the greatest possible value. Simple to say, but not so simple to achieve, as illustrated by companies’ long struggles to tame complexity.
It’s especially difficult to achieve when companies think of portfolio management as merely a synonym for assortment (or SKU) rationalization—reviewing all of the different products they sell and culling the low-performing ones. While SKU rationalization is a powerful tool to optimize portfolios, it isn’t sufficient on its own to capture the full potential of simplification. As part of the foundation for portfolio performance, companies can also look at how to optimize their portfolio for both consumer and operational value and simplify for scale.
A promising methodology has emerged by adapting “consumer architecture,” a concept that typically is considered in relation to innovation. By expanding consumer architecture’s reach to incorporate considerations of cost and supply, companies can achieve a better balance in their product portfolios.
In practice, the structure adds three complexity-reduction levers, placing the consumer firmly at the center (Exhibit 1). The three levers all require the company to examine the portfolio as whole rather than product-by-product, understanding implications both horizontally, across categories, and vertically, by value tiers within categories: low-cost to luxury.
Simplification looks beyond “which products to cut,” to find opportunities to standardize elements of how products are designed and made—retaining points of distinction that consumers value and are willing to pay for, while eliminating needless variability that adds cost without increasing revenues. Design-to-value product design applies a similar sensibility to the details of how products are conceived and made, with a particular rigor to considering the cost and value implications of adding new features. Finally, an integrated process seeks to build this methodology into the company’s way of working so that its impact endures.
The impact companies see from a portfolio performance translates not only on the bottom line, but also to a wide range of factors including accelerated speed to market, higher return on investment for capital expenses, and faster reallocation of resources to focus on value drivers (Exhibit 2).
Six steps to reduce cost and complexity
Bringing together consumer value drivers and cost efficiency integrates procurement, R&D, and marketing insights into a six-step journey that starts with target definition and finishes with implementation of new design briefs (Exhibit 3). Along the way, a transformational state of mind helps break through siloed ways of working: marketing, procurement, and R&D actively work together in small teams, and leadership fully endorses the outcome of their work (Exhibit 4).
Set margin ambition by defining cost targets
The six-step approach shifts the product- and portfolio-design orientation, anchoring them first on consumer architecture and then on cost. It’s an intense effort that takes place over a few weeks and it affects every element of portfolio management, from innovation to ongoing value-driving initiatives. Motivation will matter: accordingly, the first step is to set bold, top-down margin ambitions and cost targets, which can help create the proverbial burning platform that engages the full organization.
At the beauty company, for example, the problem was a fragmented portfolio of products that required constant refreshing and yet produced inconsistent financial results. Senior leaders, recognizing complexity as the underlying issue, charged managers with an ambitious margin-improvement target that applied even to mass-market segments under extreme competitive pressure due to disruption of traditional retail channels.
The first step for the management team was therefore to map the portfolio across and within segments to help identify inconsistencies, such as when a product’s cost of goods sold (COGS) were too high for its current segment or positioning. The team then set new targets that better matched product costs with what segments and brands could truly afford. These more-detailed targets were flexible by segment: some were based on margin improvement, others on COGS reduction, still others on lower procured spend as a percent of net revenue. In some cases, the targets even set a maximum cost for certain purchasing categories.
Assess consumer demand and drivers
The next step relies on consumer insights, which enable companies to understand how features, characteristics, and assortment correlate with differentiation, value perception, and brand recognition.
By segment, consumer insights help uncover which factors are most important in purchase decisions and customer satisfaction, which can translate to brand loyalty. Creating this fact base—and consistently highlighting the importance of specific product features—can uncover which factors matter most, while deprioritizing less-significant attributes. The beverage company confirmed that for certain categories, the thickness and material of a bottle served as an important cue that a product was premium. But the size of the mouth wasn’t an important detail to consumers, so standardizing its dimensions for easier filling across different product lines carried comparatively little risk of diminishing the premium product’s perceived value. In similar fashion, the food company took a hard look at certain high-cost ingredients, which it discovered consumers valued less than managers had thought.
Shopper insights can define additional focus areas, such as package design. Whereas lower-tiered consumer products rely on high color contrast on simple shapes to generate product recognition, premium segments tend to emphasize elaborate, differentiated shapes and materials. The risk, however, is that the differentiation can cost more than the product can feasibly recover. For the beauty company, shopper insights revealed that several complex features long used in the company’s lines had little effect on shoppers’ value perception and brand recognition. This realization provided managers the opportunity to maintain price points while substituting simpler elements.
Understand the cost of complexity
Where do complexity’s costs lie? Fundamentally in the materials and components purchased, the manufacturing process, and distribution and storage requirements. A thorough understanding of these costs, the factors driving them, and their responsiveness to design choices is therefore a central tenet of the approach. The more detailed and quantified this understanding, the easier it will be to link design choices with cost impact.
The first step is to map each cost driver, along with each design choice’s impact on cost, assessing the different feature options and their variations in quantity, quality, and sequence. In thinking through a liquor brand’s premium gift box, for example, determining the cost of color is not just a matter of deciding whether to apply a color (and which one), but where and when to apply it, which ink type and printing method to use, the ideal number of passes, and the alternative application methods that may be feasible.
Understanding the manufacturing process, both at the supplier and at a company’s own plants, will help define the effect that standardization can have at different stages. For example, glass-production efficiency is sensitive to minimum order quantity, product deformation, and thickness. Especially in lower-premium segments, where the need to maximize efficiencies is especially high, best practices favor standardized bottle shapes and dimensions; differentiation can come from other design elements that customers are more likely to notice and can be achieved at low impact to production efficiency.
Define golden rules, features menu and platforms
At this stage, companies should have the required information—target cost levels, consumer-success drivers, and product-cost drivers—to define the complexity-value equilibrium they want to achieve in shaping a portfolio. The cross-functional team representing procurement, R&D, and marketing then plays a vital role in integrating these disparate sources into an effective final vision that paves the way for efficient implementation.
First, they map features by cost and perceived differentiation (Exhibit 5). This simple matrix then evolves into two tools: a features menu, and platforming guidelines.
The features menu guides differentiation, allocating features and characteristics by portfolio segment with options to apply across premium levels. For both the beauty and the beverage companies, packaging was a major consideration: guidelines helped teams determine which features were justified at each tier. Ensuring that premium products incorporated only a minimum of high-impact differentiators to standard designs allowed these products to recover margins that had been lost to excessive design variation.
Accordingly, decisions such as these created a clear escalation path in line with each brand’s positioning. It enabled luxury segments to differentiate through advanced features while less-premium segments focused on feature-choice efficiency, meeting the targeted costs across all the portfolio.
“Platforming” describes a common template that underlies multiple different products. Automakers have used them for decades to reduce cost and complexity, so that a single drivetrain design could support everything from a performance coupe to a minivan. It applies equally well in consumer products. While it is a common belief that platforming leads to generic products fail to support distinctions among brands in a portfolio, when well managed they offer companies a variety of scenarios to appeal across many consumer segments.
Platforming guidelines therefore inform what can be platformed, where, and how. Based on functionalities, consumer and segment insights, companies can use platforming across several levels of the portfolio.
- Brands, subbrand lines, or flankers. A beauty company successfully redeployed elements of one if its most successful brands for a smaller, niche brand to minimize investments requirements on a riskier and smaller volume.
- Formats. A beverage company platformed all of its smaller formats into a single core design that it could tailor in modest, but effective ways to differentiate each brand’s appeal.
- Formulas. The food company created a common platform to support similar flavors for certain of its products.
- Tail end. For a company managing a long tail of smaller brands, platforming can even support common branding approaches—with certain pillars, or essential brand elements, in common. Fragrances, for example, are an area where this approach can work.
Optimize the existing portfolio and brief innovation to design rules
Companies can now implement through innovation, existing business, or both. The menus and platforms can be especially useful in guiding innovation and supporting the creative process before costs ever enter the system. The food company now includes the menus and platforms in its initial design-brief templates, so that new products take advantage of a revised list of less-expensive ingredients and common flavor platforms. Additional decision gates include go–no go criteria based on the alignment of the proposed product to the menus and platforms.
Companies can also use menus and platforms to assess their current portfolios and find opportunities to retrofit for faster value generation—perhaps accelerating existing packaging- or branding-review cycles to keep momentum going. Sustainability reviews offer further options for reinforcing the portfolio performance toolkit: the beverage company has used its menus and platforms to inform decisions about material substitutions in light of consumers’ rapidly evolving expectations on reducing environmental impact.
Portfolio optimization means striking the right balance between efficiency and consumer value drivers. Both practical and tangible, a consumer-backed approach to portfolio performance is more relevant than ever and can be done relatively quickly with cross-functional resources. Now is the time to capture both short-term savings on existing business and structurally innovate for the future.