Well-crafted extensions can deliver a multitude of rewards. They leverage established and recognized brands, then they one-up those brands. They add promises that speak to specific customer preferences, priorities and lifestyle choices. By filling gaps, they enhance the stakes and the profit, too. That said, why arent product line extensions the route to all value all the time? Its a matter of math. Doing that math and investigation rests on gaining full visibility of the costs.

Marketers must cast potential sales volumes and margins against investments that need to be made. The costs are not insignificant, including funds for manufacturing, technology, operations, marketing and inventory. Will the fruits of this strategy tip the scales in favor of the extra spending required? Whats more, the cost-benefit analysis must incorporate the issue of added complexity, which relates to customers as well as distributors and trade channels. Lets see how its been done by the big guns.

Take a Lead from the Leaders

For the automotive lubricants sector, product and brand extensions are not new. They have been an integral tool in marketers war chests. The first wave focused on two elements: viscosity and containers. Years later, in the 1980s and 90s, the industry introduced special usage products, including products for vehicles with high mileage, racing vehicles, light trucks and extended drain intervals. Each came in multiple viscosities. Then, in the 2000s, the retail side of the market targeted the high-value synthetics category. (This segment still offers major potential for line extensions as the size of the synthetic pie expands rapidly.)

Line extensions contribute to flagship brands in a number of ways. They defend against the brands becoming commodities, engender enhanced loyalty from customers and offer opportunities for tiered pricing within the category.

On the retail side of the business, line extensions for ExxonMobils Mobil 1 in the United States serve as a case in point. There are a total of 12, and the most recent include Mobil 1 Annual Protection (which allows 20,000 miles or 1 year between oil changes), Mobil 1 Extended Performance (15,000-mile drain interval), Mobil 1 Extended PerformanceHigh Mileagefor vehicles with over 75,000 miles on the odometer, and Mobil 1 Truck & SUV. These extensions have been critical to the companys steady year-on-year volume growth in the consumer full synthetics category; they helped achieve well above the U.S. market average rate of 8 percent.

On the commercial side, Shell has successfully extended its flagship Rotella brand in North America. Rotella rapidly grew in the early to mid-1980s with recognized performance in heavy-duty trucks among the owner-operator class of trade. It strengthened with the introduction of Rotella T multigrade in one-gallon containers that truckers could easily carry in the cab of their vehicle.

As Rotellas acceptance as a leading commercial heavy-duty diesel truck oil brand rose, Shell saw an opportunity for new product quality and pricing tiers. Later it could extend the brand to other customer sets and product lines.Shell was among the first to do this when it introduced a Rotella T synthetic blend and then a full synthetic Rotella T.

And so it went. In the early 2010s, Shell built positions with fleet operators through more Rotella brand extensions. It introduced multiple performance levels and pricing tiers across the Rotella portfolio, from Rotella T1 monogrades through Rotella T6 full synthetic. Whats more, each tier featured specialized products for fleet and natural gas applications as well as European specifications. Shell also extended the Rotella brand into adjacent products, such as antifreeze, coolants, diesel exhaust fluids and most recently gasoline-powered light trucks and SUVs with Rotella gas truck oil.

Today, more than 20 separate products bear the Rotella name. Shell did the same with its global flagship Rimula brand to forge a commanding position in the commercial lubricants and specialties business. Their marketers looked further to possible extensions of their flagship brands and the higher margins they afford. Thats why in recent years we have seen Shell extend its brands into automatic transmission fluids, gear oils and grease products, and even functional fluids, specialty agriculture and mining products.

Independent and private label players (collectively independents) have a future role, too. Some are building strong flagship brands and market share as they expand their reach across home base and export markets. Once customers recognize these brands as premium, the foundation for extending into higher-margin niches is there. Enabled by technology support from the additive companies, speed to market and relatively low cost, these players are well positioned to pursue these opportunities. We think of such companies as Amalie, DA Lubricants, Amsoil, Boss Lubricants, Roshfrans and Morris. Around the world, a number of other independents as well as some of the largest macro-distributors could achieve the brand status needed to fit this mold in the future.

Green Light or Red?

When do the benefits of a niche line product extension justify this course of action? From a supply chain perspective, each product line extension will increase complexity with only marginal increases in volume. Marketers often assume that the increased margin from brand extensions will cover the increased costs of taking on additional complexity. Lets examine the tension between the two, and where truth resides.

As a base, keep a couple of principles in mind: First, there needs to be a disciplined and functional process that takes account of all extra costs that come with the added complexity. Second and most important, business line managers who develop and control budgets must be engaged in the decision process.

Now for numbers. As a rule of thumb, major oil marketers have a target hurdle of at least 10 percent incremental increase in profit margin to justify the costs of a product line extension. In light of a marketers engine oil margins in the automotive consumer and commercial categories, this 10 percent hurdle translates to an incremental margin increase of 5 to 20 cents per liter of product. Consider whether or not these numbers are sufficient to cover costs. Are they even achievable in a competitive market?

Next, we zoom in on complexity. No doubt, added complexity increases cost. The key metric to monitor is the number of product brand variants-which includes all viscosity and packaging variances but excludes label variances, functional fluids and other non-lubricant specialty products and accessories-carried within the supply chain. Each brand extension will add to the total number of product brand variants, depending on a whole host of elements including customer preferences, distribution routes and point-of-sale requirements, as needed by the marketers.

How does this issue play out? First up are top-tier majors that have leveraged a product brand extension strategy and built a balanced portfolio of products covering the consumer, commercial and industrial segments. For them, the global total of product brand variants is in the range of 1,000 to 1,500. Those pursuing a highly differentiated strategy with lots of OEM brands or a full line of industrial specialties, such as greases, metalworking and functional fluids, will have two to three times that number.

With the implementation of global enterprise resource planning software systems, brand variants added to a product line are subject to substantial countervailing forces from the business; the push is to simplify the product brand variants and take down costs related to technology, supply chain and marketing.

For a top-tier major to launch a product line extension, the average total cost is about 25 cents per liter of product, based on developing a completely new product. That compares with 13 cents per liter if an existing product is re-branded with light-touch technology and marketing investment. Most of the total cost is driven by building and maintaining the needed product inventory in the supply chain. Other key components are advertising, promotions and trade programs. Putting this all together, returns may fall short of the 10 percent target, highlighting the potential pitfall that marketers may encounter. And it underscores why they need to do careful case-by-case assessments.

Independents: Advantages and Challenges

For independents, pluses and minuses line the path to product line extensions. Relative to the majors, they enjoy two main advantages: They have a lower cost structure and technology support from the additive companies. From these perspectives, product line extensions cost only about one-third of what majors would have to spend. Most of the time, independents are re-branding and using generic formulations from the additive companies.

So, despite their lower average price-margin position, they can achieve good net benefits from a product line extension. For an independent marketer focused on the automotive and general industrial space, this averages 8 cents per liter for developing a new product. It would be 5 cents per liter for re-branding an existing product.

There are some emerging challenges, too. Independents can act opportunistically, which may lead to a proliferation of product brands and extensions. Plus, the resulting level of complexity potentially offsets their cost advantage. Within this group of marketers, we find a broad range of portfolios, which include lubricant house brands and private labels, sometimes fuels, non-lubricant functional fluids and industrial specialties. For just the lubricant products alone, the number of product brand variants typically ranges from about 500 to 1,500; for other products, the number can spiral up to the thousands.

With competitive headwinds and margin pressure ratcheting up in the past two to three years, independents cannot depend on aggressive pricing alone to win. They need to make more marketing investments to achieve their growth aspirations. But with this cost comes increasing pressure to reduce complexity. In all, independents have harder choices to make regarding when to use a product line extension strategy.

Niche product line extensions offer many possibilities. Independents have an opportunity to learn from the successes of the majors. A well-considered strategy to extend flagship brands can pave the way to new value, but it is not without risks. The world of lubricants is quickly changing. Plus, there are ever more competitive forces intensifying margin pressures. In light of these factors, marketers must weigh the benefits against the costs. The potential is there, however, the business case is not always clear.

Suzan M. Jagger, president of Jagger Advisory, has partnered with multi­national clients across the energy industry for more than 25 years. Visit JaggerAdvisory.com or contact Suzan directly at suzan@jaggeradvisory.com.