The chewing gum increases the brand awareness of the parent brand. This leads to an increase in demand for both the chewing gum and the lozenge. This could mainly happen in two ways: Firstly, the release of a new product can remind customers about the brand and thereby lead to an increase in demand. Secondly, the customers that buy the chewing gum might be tempted to try the brand’s lozenges as well.
Before the release of the chewing gum, the sales of 1 lozenge resulted in: 8.5-4.5=4 SEK. The primary demand has now increased from 100 to 110 (index). Furthermore, 1 gum results in 8–4.5=3.5 SEK. The primary demand for the gum is 30 (incremental revenue through switching from competitors). However, 20 % of the lozenge buyers will switch to the chewing gum (first order cannibalisation). This will result in a decrease in demand of lozenge to 88 (110*0.8) and increase chewing gum demand to 52 (30+(110*0.2)). Finally, 5 % of the primary chewing gum users will switch to lozenge. Thus, the net demand of chewing gum is 50.5 (52-30*0.05) and net demand of lozenge is 89.5 (88+30*0.05). This results in: 50.5*3.5+89.5*4=534.75 which is a 134.75 increase.
This means that the potential profit from the introduction of the chewing gum is positive. We say “potential profit” since fixed costs aren’t mentioned. Therefore it is impossible to say if the gum is generating enough income to cover the potentially increased fixed costs after variable costs have been deducted. Furthermore, nothing is mentioned about possible erosion of future brand value of the core brand due to product line extension.
However, if we assume that the fixed costs are covered/non-existent and that the introduction hasn’t eroded the brand value of the core brand, it is clear that the introduction of the chewing gum has been successful.
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