The optimal pace of product updates

Abstract

Some firms (such as Intel and Medtronics) use a time-pacing strategy for new product development, introducing new generations at regular intervals. If the firm adopts a fast pace (introducing frequently) then it prematurely cannibalizes its old generation and incurs high development costs, while if it waits too long, it fails to capitalize on customer willingness-topay for more advanced technology. We develop a model to gain insight into which factors drive the pace. We consider the degree to which a new generation stimulates market growth, the rate at which it diffuses (its coefficients of innovation and imitation), the rate of decline in its margin over time, and the cost of new product development. The optimization problem is non-concave; however we are able to solve it numerically for a wide range of parameters because there is a finite number of possible solutions for each case. Somewhat intuitively, we find that a faster pace is associated with a higher market growth rate and faster margin decay. Not so intuitively, we find that relatively minor differences in the new product development cost function can significantly impact the optimal pace. Regarding the Bass coefficients of innovation and imitation, we find that a higher sum of these coefficients leads to a faster pace but with diminishing effects, and that for relatively higher sums the coefficients are effectively substitutes.

Leapfrogging in Marketing: Empirical Analysis of Kenyan Mobile Phone Industry

“…For customers to try the new entrant brand (P1) as a substitute for the old-fashioned one (P0), those above must be an enhancement (even if only viewed as such by customers) then the latter. The intention to focus or turn to new brands increases with the assumption that they will offer greater quality advantages in terms of performance compared to the old ones on the market (Boone, 2001;Druehl et al, 2009). Consumers will be less interested in leapfrogging to P2 if enhancements in P1 (especially in comparison to P0) surpass a certain threshold.…”

Introduction to Innovation WITHIN and ACROSS Borders: A Review and Future Directions

“…These authors find that the process and team factors are more consistent determinants of NPD speed than the strategy and project factors. Finally, other authors have also focused on managing this trade-off in a generational multiproduct setting (Carrillo, 2005;Druehl, Schmidt, & Souza, 2009).…”

How Inventory Cost Influences Introduction Timing of Product Line Extensions

“…Ramachandran and Krishnan (2008) study the tradeoffs in timing product launches when the core technology available is improving rapidly. Druehl et al (2009) analyze the impact of product development cost, the rate of margin decline, and the cannibalization across generations on a firm's time-pacing decision. However, the progression of product technology is not the demand driver in our model setting; in fact we focus on the case of releasing two successive (and somewhat differentiated) generations of the same product in the absence of development constraints.…”

“…On one hand, as the successive generations are substitutes, delaying the introduction of one generation leads to less cannibalization of the existing generation. On the other hand, a large body of empirical marketing research (Bass 2004) suggests that demand diffusion begins slowly, speeds up, and slows down after maturity, so if the firm waits too long, sales may have slowed considerably as the product has already diffused through the market (Druehl et al 2009), especially considering rapidly changing customer preference. According to Wilson and Norton (1989), "the timing of the introduction of the line extension affects the subsequent sales pattern for both products and the total profit to be made within the planning period," so the decision of when to introduce a new variant of an existing product is a critical tactical decision.…”