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Product Differentiation and Commonality in Design: Balancing Revenue and Cost Drivers

Product Differentiation and Commonality in Design: Balancing Revenue and Cost Drivers Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product differentiation. We explicitly investigate the marketing-manufacturing trade-off and derive analytical implications for three possible design configurations: unique, premium-common, and basic-common. Our model considers two distinct segments of consumers. Some of the implications of our analysis are not readily apparent. For example, when the high-quality component is made common, the average quality of the products offered to the two segments increases. One may infer that with higher average quality, higher prices or higher total revenues might ensue. However, this may not be the case, as detailed in the paper. Finally, our analysis provides a useful framework to develop an index that can rank order components in terms of their attractiveness for commonality. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Science INFORMS

Product Differentiation and Commonality in Design: Balancing Revenue and Cost Drivers

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Publisher
INFORMS
Copyright
Copyright © INFORMS
Subject
Research Article - Special Issue on Design and Development
ISSN
0025-1909
eISSN
1526-5501
DOI
10.1287/mnsc.47.1.37.10672
Publisher site
See Article on Publisher Site

Abstract

Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product differentiation. We explicitly investigate the marketing-manufacturing trade-off and derive analytical implications for three possible design configurations: unique, premium-common, and basic-common. Our model considers two distinct segments of consumers. Some of the implications of our analysis are not readily apparent. For example, when the high-quality component is made common, the average quality of the products offered to the two segments increases. One may infer that with higher average quality, higher prices or higher total revenues might ensue. However, this may not be the case, as detailed in the paper. Finally, our analysis provides a useful framework to develop an index that can rank order components in terms of their attractiveness for commonality.

Journal

Management Science – INFORMS

Published: Jan 9, 2001

Keywords: Keywords : Design ; Product Design ; Commonality ; Marketing ; Segmentation ; Marketing/Manufacturing Interface

References

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