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

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.Design, Product Design, Commonality, Marketing, Segmentation, Marketing/Manufacturing Interface

Product Line Design and Production Technology

“…Desai et al (2001) and Heese and Swaminathan (2006) generalize this setup to allow the manufacturing cost to be mitigated by exerting the design effort. These papers demonstrate that the benefits of component commonality have to be balanced against dilution in model differentiation.…”

The Value of Component Commonality in a Dynamic Inventory System with Lead Times

“…For recent literature reviews, see, Krishnan and Ulrich (2001), Ramdas (2003) and Song and Zipkin (2003). While component commonality has substantial impact on issues such as product development, supply chain complexity and production costs, see e.g., Desai et al (2001), Fisher et al (1999), Gupta and Krishnan (1999) and Thonemann and Brandeau (2000), our focus here is its impact on inventory-service tradeoffs.…”

Product Line Selection and Pricing with Modularity in Design

“…In the product development literature, Desai et al (2001) provide a conceptual design configuration model of product quality via sharing components in a market with two segments (high and low), study the balance between cost and revenue, and identify conditions when commonality should be used in two differentiated products. Kim and Chhajed (2002) consider a product line design model in which a monopolist offers two multiattribute products to serve a market with two customer segments.…”