Supporting New Product or Service Introductions: Location, Marketing, and Word of Mouth

Abstract

Introduction of a new, innovative product or service is a fundamental problem that managers face regularly. The temporal sales pattern of such a product is often dynamically influenced by word of mouth as well as by marketing and distribution support. Appropriate marketing support strategies must be specified to induce the best sales pattern; however, the success of these strategies is heavily tied to the accessibility of the retail facilities, whether physical stores or virtual ones such as the Internet or phone. Managing the relation between accessibility and marketing support becomes more challenging when the firm faces a limited time, often due to short product life cycle. In this work, we present a general model for the joint design of the network of retail facilities and marketing strategies in the presence of word-of-mouth effects and limited time horizon. We develop exact and heuristic solution methods and provide insights on the structure of the optimal solution. Our solution methods identify the number and location of retail facilities to carry the product, as well as the proper mix of marketing channels and expenditures in them over time. Our results demonstrate that significant profit improvement can be achievable by jointly optimizing the design of the network of retail facilities with the choice of marketing strategies. Results of numerical experiments and an illustrative case study on opening Nespresso boutiques are also reported.