Is There a Presence Effect?
Posted: 21 Apr 1998
Date Written: 1995
Line extensions are the additions to a brand s product line within a given category. They bear the brand s name. In this paper we propose a new model for how line extensions interact with each other. The traditional view is that new line extensions are a low-risk way to tap segments of the market which were being underserved by the brand before. But if they are not positioned well, they may cannibalize existing line items and not cover their fixed costs. Practitioners have observed, however, that sometimes new line extensions increase the sales of existing line items. We call this the presence effect phenomenon. The purpose of the paper is to model the presence effect and show its presence in a variety of grocery-store categories. Using individual level scanner data on four product categories (margarine, detergents, cereal, and yogurt), we estimate two brand choice models and demonstrate that presence effects do indeed exist. The contribution of this paper to the best practice in modeling packaged goods is that it (1) recognizes and takes into account the presence effects of line extensions, and (2) provides a better basis for managers to decide the optimal number of line extensions.
JEL Classification: M31, L81
Suggested Citation: Suggested Citation