Product line design and positioning using add-on services

Abstract

In this paper, we consider a generic product line design and positioning problem in the context of variety creation using a core product and add-on services. While the functional output of the core product is identical across the products, product variety is created using add-on services that do not alter the functionality of the core product. The motivation for our study comes from emerging for-profit private healthcare service providers in India. We consider two specific scenarios – simultaneous and sequential design – and focus on obtaining insights into the implications of the core product on design and positioning of add-on services. We show that for the core product cost below a threshold the firm does not cover the entire market. For the cost beyond another threshold, it does not introduce any product. The product quality increases in both the core product cost and the consumer valuation of the product relative to the cost of quality; however, the quality based distinction decreases (increases) in the cost parameters (product valuation). In the two-product sequential product design scenario, we show that both products are active only under certain situations. We derive conditions under which the second product has quality higher (lower) than that of the first product. When the firm initially enters the market with a product that corresponds to single product design scenario, we show that the firm introduces a lower quality product and increases profit by increasing the market share. By comparing our results in the two scenarios, we show that the gap between positive (and similarly negative) implications of the two scenarios decreases as the core product cost increases with respect to the cost of quality. In a duopoly setting, we also illustrate how the design and positioning of an incumbent׳s product impacts a new entrant׳s product. Our model and results may be seen as building blocks for obtaining managerial insights.