An experimental investigation of valuation change due to commonality in vertical product line extension

Abstract

Commonality in product line design refers to using identical product features or modules in multiple products. The use of commonality in product line extensions is a growing practice in many industries. We consider vertical product line extensions to lower- and higher-end products, and study the effects of identical feature levels on consumers’ evaluation of original products. Using a between-subject experimental design, we examine the effect of commonality using the bicycle as the example product. This experiment is then extended to eight different service and manufactured products. Results show that in many cases identical feature levels increase the perceived similarity between original and extension products. This influences the valuation of original products: valuation of the original low-end product increases while valuation of the original high-end product decreases. However, the amount of valuation change is not necessarily the same for the original low- and high-end products. This valuation change occurs regardless of buyers’ knowledge level of the product and is sometimes moderated by a large difference in a differentiated feature. This study suggests the importance of accounting for the demand-side effect of commonality in product design decisions. Change in customers’ valuation may call for an adjustment in price—the price of a high-end product may have to be lowered due to valuation discount, and the price of a low-end product could be raised to take advantage of valuation premium. This change in valuation does not occur for every feature in every product. Therefore, by properly selecting the features that are identical, a firm may be able to take advantage of valuation premium without sacrificing valuation discount and enjoy the economies of scale in manufacturing and logistics due to commonality.