How Inventory Cost Influences Introduction Timing of Product Line Extensions

Abstract

In the industry with radical technology push or rapidly changing customer preference, it is firms' common wisdom to introduce high‐end product first, and follow by low‐end product‐line extensions. A key decision in this “down‐market stretch” strategy is the introduction time. High inventory cost is pervasive in such industries, but its impact has long been ignored during the presale planning stage. This study takes a first step toward filling this gap. We propose an integrated inventory (supply) and diffusion (demand) framework and analyze how inventory cost influences the introduction timing of product‐line extensions, considering substitution effect among successive generations. We show that under low inventory cost or frequent replenishment ordering policy, the optimal introduction time indeed follows the well‐known “now or never” rule. However, sequential introduction becomes optimal as the inventory holding gets more substantial or the product life cycle gets shorter. The optimal introduction timing can increase or decrease with the inventory cost depending on the marketplace setting, requiring a careful analysis.

Status Goods and Vertical Line Extensions

“…For example, Moorthy and Png (1992) show that firms can reduce cannibalization by sequentially introducing vertically differentiated products rather than simultaneously introducing them. Ke et al (2013) find that inventory cost influences the optimal introduction timing of products. Other researchers examine some of the determinants and consequences of introducing vertical line extensions.…”

“…Ke et al. (2013) find that inventory cost influences the optimal introduction timing of products. Other researchers examine some of the determinants and consequences of introducing vertical line extensions.…”

Understanding major dimensions and determinants that help in diffusion & adoption of product innovation: using AHP approach

“…Compelling timing is necessary to pull in new customer and to optimise profit and revenue on innovations. (Klastorin and Tsai, 2004;Regibeau and Rockett, 1996;Srivastava and Lee, 2005;Tony Ke, Max Shen and Li, 2013). In a competitive business sector, the timing and planning of introduction are also influenced by the introduction timing of similar product which is launched by other competitive organisations.…”

Modeling and simulating the multi-generation product sales, production and inventory system within the context of quality upgrades

“…Consumers behave differently when buying multiple generations of products [32,47], and it is reasonable to consider the substitution and competition between multiple generations of products as the cannibalization of new products over old products. Therefore, cannibalization between multiple generations of products must be considered in the modeling process [30,33].…”