Product Positioning in a Two-Dimensional Vertical Differentiation Model: The Role of Quality Costs

Dominique  Lauga; Elie  Ofek

Article | Marketing Science

Product Positioning in a Two-Dimensional Vertical Differentiation Model: The Role of Quality Costs

by Dominique Lauga and Elie Ofek

Abstract

We study a duopoly model where consumers are heterogeneous with respect to their willingness to pay for two product characteristics and marginal costs are increasing with the quality level chosen on each attribute. We show that while firms seek to manage competition through product positioning, their differentiation strategies critically depend on how costly it is to provide higher quality. When the cost of providing quality is not too high, firms use only one attribute to differentiate their products: they maximally differentiate on one dimension and minimally differentiate on the other dimension (a Max-Min equilibrium). Furthermore, they always differentiate along the dimension with the greater attribute range. As for the dimension with the smaller range and along which they agglomerate, both firms either choose the highest quality level or the lowest quality level possible, depending on whether the marginal costs of quality provision are low or intermediate, respectively. However, for larger quality provision costs, firms exploit both dimensions to differentiate their products. In particular, we characterize a maximal differentiation equilibrium in which one firm chooses the highest quality level on both attributes, while its rival offers the lowest quality level on both attributes (a Max-Max equilibrium). We discuss the managerial implications of our findings and explain how they enrich and qualify previous results reported in the literature on two-dimensional differentiation models.

Keywords: Duopoly and Oligopoly; Customers; Quality; Product Positioning; Competition; Management; Cost; Product;

Format: Print

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Citation:

Lauga, Dominique, and Elie Ofek. "Product Positioning in a Two-Dimensional Vertical Differentiation Model: The Role of Quality Costs." Marketing Science 30, no. 5 (September–October 2011).

Case | HBS Case Collection | July 2020

Pattern Brands

Sunil Gupta, Elie Ofek and Julia Kelley

In March 2020, direct-to-consumer (DTC) company Pattern Brands needed to decide how to allocate resources across its different brands. Pattern Co-Founders Nick Ling and Emmett Shine hoped to avoid the pitfalls faced by some DTC companies—such as inability to scale and lack of competitive differentiation—by relying on their previous experience running a successful branding and marketing agency. Rather than focusing on a single brand, they conceived Pattern as a “DTC 2.0” model—a portfolio of 5 to 10 brands that shared a common theme of activities related to the home and a common mission of helping millennials enjoy daily life. Since its founding in August 2019, Pattern had launched cookware brand Equal Parts and home organization brand Open Spaces. Although Pattern’s team still believed strongly in the benefits of a multi-brand strategy, Open Spaces’ sales and unit economics had significantly outperformed Equal Parts’ to date. Pattern’s leadership wanted to build on Open Spaces’ early momentum with new product colors and product lines, but they debated whether to act on the results of a recent customer survey indicating a positive response to an Equal Parts product redesign. Ling and Shine now had several decisions to consider. How should they allocate resources between repositioning Equal Parts and continuing to grow Open Spaces? How and when should they continue building Pattern’s portfolio by developing a third brand? How much should they invest in marketing parent brand Pattern? More broadly, did Pattern’s model represent the future of DTC brands?

Keywords: Brands and Branding; Marketing Channels; Marketing Strategy; Product Marketing; Product Launch; Product Positioning; Business Model; Business Startups; Growth and Development Strategy; Demand and Consumers; Business Strategy; Diversification; Competitive Advantage; Consumer Products Industry; Retail Industry; North and Central America; United States; New York (city, NY); New York (state, US);

Citation:

Gupta, Sunil, Elie Ofek, and Julia Kelley. "Pattern Brands." Harvard Business School Case 521-009, July 2020. View Details

Cite View Details Educators

The digital revolution has allowed companies to amass considerable amounts of data on their customers. Using this information to generate actionable insights is fast becoming a critical skill that firms must master if they wish to effectively compete and win in today’s data-driven marketplace. This note explains the value of examining customer metrics, such as retention rate, revenues, and social influence (k-factor), on an ongoing basis by conducting a cohort analysis. Such an analysis segments customers using one or more criteria, and tracks the behavior and performance of each of these segments over time. Using several instructive examples, the presentation highlights the benefits of running a cohort analysis for deriving a deep understanding of customer trends. Moreover, the examples expose the pitfalls that arise from not accounting for segment characteristics (such as when a customer joined, from what media vehicle they were acquired, how heavily they use the product, etc.) and not paying attention to the evolution of customer metrics over time. The implications of conducting a cohort analysis for firm strategy and for determining customer lifetime value (CLV) are discussed.

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Product Positioning in a Two-Dimensional Vertical Differentiation Model: The Role of Quality Costs

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