Eliminate the Dog: Decide Which Items are Worthless
Do you have too much inventory but you don’t know which items to keep pushing in the market and which ones you should say “Hasta la Vista” to?
Learn how to manage your inventory with pricing hacks.
We were taught many different, complicated, and in my opinion, useless things in school. To this day, I really question why I needed to learn half of the things that I did and instead, just wish I had been introduced to more interesting and useful topics such as business strategies. There are many different kinds such as growth, product differentiation, price skimming, and acquisition. These strategies are all so very beneficial to us aspiring entrepreneurs.
Today however, we’re going to cover the BCG matrix, which falls under the growth strategy.
The BCG matrix was developed in the early 1970s by the Boston Consulting Group, hence the name, which is a popular consulting firm. It was developed by Bruce Henderson as a way for companies to determine how to divide their financial resources. Many companies have a number of their own product lines, so they need to be able to figure out how they’re going to allocate their resources.
Now, you may be wondering:
Why don’t I just split everything equally so that each product line gets the same amount of resources?
Well, you could, but that’s not the best method. It would be better if you used a more accurate approach for distributing those funds so that you would get the best ROI.
In addition, the assortment of your inventory, especially for online retailers, has a significant impact on your profits and online sales.
That’s where the BCG matrix comes to play.
Variables of the BCG matrix
Before figuring out how exactly you plan on splitting up these costs, you need to take a look at a couple of different areas.
This variable on the x-axis is the rate of the overall market that the business has control over. For example, the statistics from IDC show that the smartphone vendor market share of Apple in the first quarter of 2017 was 14.7%. If phone companies sold around 344.3 million smartphones around the world then that means that Apple sold roughly 50 million of them. If you were interested, you could also find the market share of the company’s yearly revenue, or to be more specific, the revenue from the newest iPhone since revenue is what is typically looked at when establishing market share. However, the sky is your limit.
Keep in mind, one of the assumptions that the BCG matrix makes is that if a business has a high market share, nine times out of ten, it’s pretty successful financially.
This variable on the y-axis is the percentage at which the market is expanding. It’s a measure of how appealing the market is, so the ones that are growing at higher percentages are much more appealing to companies. They feel that there’s more opportunity there, and rightfully so, since the unattractive ones that try to compete against those that are already dominating in a market with little growth are just following a recipe for disaster.
Components of the BCG matrix
Now that you are familiar with the variables of the BCG matrix, let’s learn about the different components that make it up. Use them to figure out how to label your own items.
Stars are characterized by both high market share and growth. In this case, you’re most likely the market leader and so your product generates a lot of revenue, which is an inference that the BCG matrix makes anyway. Additionally, it’s in a market that is continuously expanding by large percentages so there is still plenty of opportunity and potential. This is the ideal place for products to be at since it’s very attractive to businesses.
Today, the Star of Apple is most likely the iWatch. It currently dominates its market and is only continuing to evolve and become greater. Others are now latching onto the idea as well.
Stars can go two routes. You could either utilize a build-market share strategy if you wanted to carve out an even bigger part of the market share, despite already having quite a big chunk of it. Since you’re the leader in the market, you could, on the other hand, go with the hold strategy. That means that you would just be maintaining the status quo.
Eventually though, Stars become Cash Cows.
They’re characterized by a low market growth, but a high market share. In other words, you control a large part of the market, but there’s not enough potential and too much competition. However, at this point, you’re no longer trying to establish yourself as the leader of the market because you already are! That’s why you no longer have to focus on promoting and advertising and thus can spend your money elsewhere. Instead, you sell yourself with brand awareness.
With a Cash Cow, you would typically utilize a harvest strategy. That means that you would reduce financial support since the product is already going to self itself. As the name implies, you just milk the item for what it’s worth to generate as much money as possible.
As a result, the money that Apple makes goes into developing their Stars and Question Marks, instead.
Question Marks or Problem Children
They are characterized by a low market share, but a high market growth, and thus we often just don’t know what to do with these since they are so problematic. So, in a way, they’re like Dogs, but with potential. In this case, your product is more likely in a newer market with less competition, since it’s at a higher growth rate. As a result, you need to use some of your financial resources to find out whether your item could potentially be successful.
However, that’s where all of the questions and issues arise. Although we can commit financial resources to it, in the end, it still could end up just being a Dog. That’s why it’s one of the most difficult components of the BCG matrix.
Returning back to Apple, an item that would most likely fall under this umbrella is Apple Music and Apple TV. They’re both in fairly new markets that have the opportunity to grow. However, because they both currently have a low market share, they have some competition. Apple Music’s current main rival is Spotify and Apple TV’s is Chromecast.
They could go about this using two strategies: either eliminate them or build market share. The idea could technically be divested and instead, their financial resources could be used towards something else, but they’d be doing so without knowing whether either Apple products would be profitable and turn into a Star. However, the goal of a Question Mark is to turn into a Star. That’s why Apple utilized the build market share strategy instead.
Dog’s are characterized by both low market share and growth. That means that you most likely aren’t the dominant company in this market. As a result, this item probably doesn’t produce too much revenue for you. Additionally, your product is in a slowly growing market, which means that you’ve got lots of competition.
How do you change this and get your product off the ground?
Well, you could advertise and promote to increase awareness since consumers are most likely still in the dark about the product. However, you need time and money. Additionally, looking at the market growth, you’ve really got to question whether you really want to be in it.
Will it be worth it in the long run?
Take, for example, Apple’s iPod Classic. It used to be one of the most dominant portable music players. However, now that smartphones are capable of doing exactly that, not to mention many other things, this device is no longer relevant. As a result, since it’s constantly decreasing in market share, Apple decided to implement the divesting strategy. In other words, they eliminated the item from their inventory.
As a result, you really need to take into consideration whether you want to invest in a dying market. If you decide to invest in your product, then sure, maybe you’ll gain a little bit of market share, but that product alone won’t increase market growth, so in the end, you’ll just be going into a losing battle.
As the title suggests, when you find out which product is the dog—eliminate it. Your product is hardly providing you with much revenue and doesn’t have a promising future. Instead, choose the Question Marks that you’re willing to use this build market share strategy on and which ones you are going to divest. Once they’ve become a Star, just stay put until the market growth starts to decrease. At that point, hopefully, you’ll be a true Cash Cow and will be able to just let your product speak for itself to generate as much revenue as possible.
Now that you’ve organized your inventory, you can watch your web store’s profits and online sales soar.
However, if you don’t think that this inventory segmentation is the best one for you, there are many other assortment analysis to choose from such as the ABC-analysis.