Flexible Products for Dynamic Preferences

Abstract

Consumers often have needs that change in a dynamic fashion over time due to physiological, mental, or environmental variations. We develop a model to address a product strategy question on how to satisfy dynamic consumer preferences: Should a firm offer multiple standard products, each designed for a specific purpose (e.g., several specialized golf clubs), or a flexible product that can be reconfigured by consumers as their preferences change (e.g., one adjustable golf club)? Often the latter approach is fuelled by new technology, like the dial‐a‐dose system that Novo Nordisk invented and perfected over the years for its insulin pens. We find that products that deliver a high utility to consumers are ideal candidates for flexible designs, as higher utility encourages reconfiguration and justifies a flexibility premium. We also discover a non‐obvious relationship between optimal product strategy and dynamic consumer preferences. Intuition suggests that product flexibility would be more valuable when consumer preferences are less predictable. Instead, we find that a flexible product does not always lead to higher profits when consumer preferences are more uncertain; flexibility is most profitable when preference uncertainty is in an intermediate range. Additionally, we derive insights regarding the role of consumer patience, unit production costs, utility and durability differences between flexible and standard products, and heterogeneity in consumers’ product valuations. We find that imperfect durability can be an advantage for flexible products, and that heterogeneity can lead to a hybrid optimal product strategy, where offering a mix of flexible and standard products enables price discrimination between high‐ and low‐valuation consumers.