Flexible Products for Dynamic Preferences

Abstract

Consumers often have needs that change in a dynamic fashion over time due to physiological, mental or environmental variations. We develop a model to address a product strategy question on how to satisfy dynamic consumer preferences: Should a firm offer multiple standard products, each designed for a specific purpose (e.g., several specialized golf clubs), or a flexible product that can be reconfigured by consumers as their preferences change (e.g., one adjustable golf club)? Often the latter approach is fueled by new technology, like the dial-a-dose system that Novo Nordisk invented and perfected over the years for its insulin pens. We find that products that deliver a high utility to consumers are ideal candidates for flexible designs, as higher utility encourages reconfiguration and justifies a higher flexibility premium. This offers an explanation as to why flexible products are typically sold at significant premiums over their ‘inflexible’ counterparts. We also discover a non-obvious relationship between optimal product strategy and dynamic consumer preferences. Intuition suggests that product flexibility would be more valuable when consumer preferences are more dynamic in the sense of changing more often. On the contrary, we find that a flexible product may lead to higher profits than a portfolio of standard products when consumer preferences are more stable. While higher stability in preferences reduces the frequency of reconfigurations, it also increases the value of each reconfiguration when preference shifts do occur. Finally, we also investigate the impact of heterogeneity in consumer preferences. We find that it can lead to a hybrid product strategy being optimal, where offering a mix of flexible and standard products enables efficient price discrimination between high- and low-end consumers.

Keywords: Product strategy, flexible products, new product design, product variety management, post-purchase product variety, horizontal product differentiation, bundling, dynamic consumer preferences