43 Pages Posted: 23 Jul 2015 Last revised: 28 Mar 2017
Date Written: July 27, 2015
A mass customization strategy enables a firm to match its product designs to unique consumer tastes. In a classic horizontal product-differentiation framework, a consumer’s utility is a decreasing function of the distance between their ideal taste and the taste defined by the most closely aligned product the firm offers. A consumer thus considers the taste mismatch associated with their purchased product, but otherwise the positioning of the firm’s product portfolio (or, “brand image”) is immaterial. In contrast, self-congruency theory suggests that consumers assess how well both the purchased product and its overall brand image match with their ideal taste. Therefore, we incorporate within the consumer utility function both product-specific and brand-level components. Mass customization has the potential to improve taste alignment in regards to a specific purchased product, but at the risk of increasing brand dilution. Absent brand dilution concerns, a firm will optimally serve all consumers’ ideal tastes at a single price. In contrast, by endogenizing dilution costs within the consumer utility model, we prove that a mass-customizing firm optimally uses differential pricing. Moreover, we show that the firm offers reduced prices to consumers with extreme tastes (to stimulate consumer “travel”), with a higher and fixed price being offered to those consumers having more central (mainstream) tastes. Given that a continuous spectrum of prices will likely not be practical in application, we also consider the more pragmatic approach of augmenting the uniformly priced mass customization range with preset (non-customized) outlying designs, which serve customers at the taste extremes. We prove this practical approach performs close to optimal.
Keywords: Mass customization, product portfolio and pricing, variety externalities, uniform pricing, differential pricing
Suggested Citation: Suggested Citation
Cil, Eren and Pangburn, Michael S., Mass Customization and Guardrails: 'You Can't Be All Things to All People' (July 27, 2015). Available at SSRN: https://ssrn.com/abstract=2634208 or http://dx.doi.org/10.2139/ssrn.2634208