You have a line of widgets, and they sell really well. A million dollars last year.
So you decide to expand ... you offer a cousin of widgets ... bidgets!
- Widget Sales drop from $1,000,000 to $800,000.
- Bidget Sales are $500,000.
- Total Sales = $1,300,000.
You're frustrated a bit that widgets seem to be "dying", so you introduce quidgets!
- Widget Sales drop from $800,000 to $700,000.
- Bidget Sales drop from $500,000 to $400,000.
- Quidget Sales are $400,000.
- Total Sales = $1,500,000.
Here's another fun way to look at the dynamic.
- 0 Product Lines = $0.
- 1 Product Line = $1,000,000.
- 2 Product Lines = $1,300,000.
- 3 Product Lines = $1,500,000.
Transformed into an index gets us to this:
- 0.000 , 0.000.
- 0.333 , 0.667.
- 0.667 , 0.867.
- 1.000 , 1.000.
Guess what? That's another situation where a*(x^b) comes into play!!
- a = 1.009.
- b = 0.387.
And just like that, we have a forecasting tool to help us figure out how big or small our merchandising assortment needs to be!