An Integrated Operations-Marketing Model for Innovative Products and Services

Abstract

This paper develops an integrated operations-marketing model for a profit-maximizing firm dealing with an innovative product or service. We assume that customer demand is random, and sensitive towards both the price as well as the non-price factors. Specifically, the mean demand is decreasing in the price charged and increasing in the non-price attributes provided. Also, higher values of attribute levels require more investment cost on the part of the firm. Our model can help firms determine the optimal pricing, stocking and attribute level values, and also indicate the required modifications in those decisions with changes in the operating conditions. One of the major contributions of our research is that we show how attribute-sensitivity and randomness of demand affect the firm's optimaldecision. The former induces firms to market better products, increase availability and extract a price premium from the customers. On the other hand, presence of stochasticity creates overstocking risk and forces firms to hold less stock and set attribute levels at low values. The inferior products must then be sold at a lower price. Ignoring either attribute sensitivity or randomness, as is done in the traditional operations and marketing literature, respectively, can lead to significantly sub-optimal decision variable values (either larger or smaller depending on which factor is ignored). We also identify the conditions under which managers must be especially careful about the model formulation.

Keywords: Newsvendor problem, Demand Uncertainty, Pricing, Attribute levels, Operations-marketing interface