Platform and product design for markets with quality and feature sensitive customers

Abstract

To cost effectively offer distinctive products to the market, many companies resort to product platforms, defined as a common base from which a set of products are derived. Yet, the interaction between both types of decisions (product development versus product portfolio design) is poorly understood. Indeed, operational aspects (such as platform production costs and customization costs) and marketing aspects (e.g., the customer's sensitivity to product quality and features, along with his price sensitivity) jointly impact the optimal product portfolio, and the optimal platform design.

In this article, we analytically study the joint optimization of platform and product portfolio decisions. We highlight the impact of operational parameters on the optimal product differentiation (horizontal vs vertical), and, vice versa, the impact of marketing parameters on the optimal product development strategy (independent vs platform development). The marketing parameters do not always impact the optimal product development strategy: we obtain two necessary conditions under which the impact of marketing parameters disappears. Interestingly, we find that the use of platforms may actually counteract vertical differentiation, especially when the customization cost is high. We also find that the optimal platform quality is independent of the product differentiation strategy; with vertical differentiation, though, the optimal platform is not necessarily underdesigned. Numerical simulation results show that our insights remain stable under different conditions. The model and insights can be helpful for companies to evaluate their current strategies, as illustrated in a case study