Product line design with vertical and horizontal consumer heterogeneity: the effect of distribution channel structure on the optimal quality and customization levels

Purpose The purpose of this study is to analyze the problem of optimal product line design in marketing channels where consumers are heterogeneous in both horizontal and vertical dimensions. Design/methodology/approach This paper develops a model to evaluate when it is preferable for a firm to extend the product line in a vertical or horizontal direction. Consumers are modeled as being vertically heterogeneous with respect to their valuation of quality and horizontally heterogeneous with respect to their preference on the esthetic component of the product. These model characteristics allow us to consider a broader set of product line extension strategies. By considering both a vertically integrated channel and a decentralized channel, this study investigates how channel structure influences optimal product line design. The problem with supplemental numerical analyses is mathematically analyzed. Findings The analysis shows that a horizontal product line extension strategy that offers the customized product can be used as an alternative to a vertical product line extension strategy. If the fixed cost is not too high, offering the customized product with low quality may be preferred to the quality-based segmentation strategy. Furthermore, the analysis shows that the channel structure is influential as the preference for the horizontal product line extension strategy is more pronounced in the decentralized channel than in the centralized channel. Research limitations/implications The analysis presented in this paper is limited by the consideration of full market coverage. Further research is needed to see how the results can be generalized to the case with partial market coverage. Practical implications The analysis suggests that a firm may consider product customization as part of its product line strategy. Information regarding market characteristics and channel structure is important when deciding on the optimal product line design. Originality/value The model reflects a more realistic marketing strategy and channel structure than previous studies that typically consider product line extension in only one direction and focus on the centralized distribution channel. Combining the standard product line extension and customization strategies also represents an important contribution to the literature. These extensions produce interesting new results and insights into a firm’s optimal product line design strategy.

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Does channel decentralization lead to low quality product lines?

European Journal of Marketing ◽

10.1108/ejm-06-2013-0335 ◽

2014 ◽

Vol 48 (9/10) ◽

pp. 1870-1891 ◽

Cited By ~ 5

Author(s):

Hwan Chung ◽

Eunkyu Lee

Keyword(s):

Product Line ◽

Channel Structure ◽

Theoretic Model ◽

Product Lines ◽

Content Type ◽

Product Line Design ◽

Quality Product ◽

Game Theoretic ◽

Heterogeneous Consumers ◽

Line Design

Purpose – The purpose of this study is to analyze the problem of optimal product line design in marketing channels. Design/methodology/approach – This paper develops a game theoretic model, in which a firm markets a line of a limited number of products at different quality levels to serve a market composed of multiple consumer segments. The consumer segments are modeled as clusters of somewhat heterogeneous consumers as typically observed in the real world. These model characteristics allow us to consider a broader set of targeting strategies such as sub-segmentation and partial cannibalization which have not been considered previously. By considering both a vertically integrated channel and a decentralized channel, we investigate how channel structure influences optimal product line design. We analyze the model mathematically with supplemental numerical analyses. Findings – Our analysis shows that “quality distortion” in product line design is not limited to the low-end product, as previously reported, but can happen to the high-end product. The direction of these quality distortions may be downward or upward, leading to either increased or decreased differentiation between the two products. Furthermore, channel decentralization makes it more likely for the firm to strategically choose upward partial cannibalization or sub-segmentation. Consequently, contrary to previous studies, we demonstrate that there exist conditions under which channel decentralization leads to higher product quality. Originality/value – Our model reflects a more realistic market environment and a firm’s practical constraints than previous studies, which typically assume perfect homogeneity within each segment and/or the feasibility of offering an infinite number of products. This extension produces interesting new results and insights that provide more practical implications for a firm’s optimal product line design strategy.

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On the evaluation of commonality strategy in product line design: The effect of valuation change and distribution channel structure

Omega ◽

10.1016/j.omega.2018.01.009 ◽

2019 ◽

Vol 83 ◽

pp. 14-25 ◽

Cited By ~ 2

Author(s):

Hartanto Wong ◽

Dharma Lesmono ◽

Dilip Chhajed ◽

Kilsun Kim

Keyword(s):

Distribution Channel ◽

Product Line ◽

Channel Structure ◽

Product Line Design ◽

Line Design

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Candy Confectioneries Pvt Limited (CCL)

Emerald Emerging Markets Case Studies ◽

10.1108/eemcs-07-2016-0155 ◽

2017 ◽

Vol 7 (1) ◽

pp. 1-26

Author(s):

Sajjan Singhvi ◽

Gaurav Sharma ◽

Rajat Gera

Keyword(s):

Rural Areas ◽

Sales Management ◽

Distribution Channel ◽

Channel Structure ◽

Rural India ◽

Channel Management ◽

Content Type ◽

Distribution Management ◽

Rural Market ◽

Market Coverage

Subject area Rural Marketing, Sales and Distribution Management, Salesperson Motivation, Channel Management. Study level/applicability The case can be used in sales management, channel management and rural marketing courses offered to graduate students of MBA degrees. In the sales management courses, the emphasis is on understanding the typical tasks that the rural salesperson is required to conduct. The case can be used to design a suitable motivation-mix for a rural salesperson after analysing their approach towards work. In a rural marketing course, the case can be used to understand the sales and distribution management of fast-moving consumer good products in rural India. The case can be used in channel management courses to design an appropriate channel structure in the rural market in India and utilized for managing the distributors’ salesforce for effective and improved market coverage in rural areas. Case overview Candy Confectioneries Private Limited started its operations in 1995, and was one of the largest confectionery players in India with a market share of 20 per cent. The company had achieved sales of Rs 20bn in 2014 and had 15 confectionery brands in the market. The company was also trying hard to establish itself in the snacks category. The company had nationwide operations, and it was important for the company to expand into the rural market. It served its markets through a comprehensive urban and rural distribution setup. In the rural distribution network, the rural sales representatives (RSRs) played a key role and perhaps were one of the most critical factors in covering the rural market. The RSR system was typical to suit the requirement of product-market coverage with its limitations. The case broadly profiles eight RSRs who were engaged to cover a specific territory in the State of Bihar in India. It also describes their approaches to work and complexities emerging thereof in achieving the best results for the organization. Expected learning outcomes The case has the following learning objectives: Understanding the design of sales and distribution channel structure followed for distribution and selling of confectionery products in rural India. Examining whether the existing system is adequate to achieve the goals of the firm. Evaluating the performance of each salesperson and identifying common factors to formulate the salesforce policies. Arriving at a suitable motivation-mix for the rural salesperson. Supplementary materials Teaching notes are available for educators only. Please contact your library to gain login details or email [email protected] to request teaching notes. Subject code CSS 8: Marketing.

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