Software locking special features: Optimal marketing and operational strategies for a manufacturer

Wenting Pan and Candice H. Huynh

International Journal of Production Economics, 2024, vol. 273, issue C

Abstract: This paper studies a manufacturer that produces and sells a low-end product and a high-end product. The manufacturer can utilize the operational strategy of producing one uniform product but software lock the special features from the customers who did not pay the premium price for the high-end product. The software lock enables the manufacturer to further invest in marketing efforts to promote the low-end customer to buy the special features well after the purchase and delivery of the product. We provide the necessary and sufficient conditions under which the manufacturer should produce one uniform product and utilize the software lock strategy instead of the traditional manufacturer that produces two distinct products with the possibility of downward product substitution. Our paper establishes the threshold production costs required for the manufacturer to produce one uniform product. The results from our numerical studies confirm the validity of our mathematical models and provide further insights into the impact price, cost, demand uncertainty, and marketing efforts have on the optimal production quantity and total profit. We find that interestingly, when the expected proportion of high-end demand increases, the threshold cost of the low-end product for the manufacturer to produce one uniform product, initially decreases then it increases.

Keywords: Optimal production quantity; Marketing expense; Downward substitution; Demand uncertainty (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:273:y:2024:i:c:s0925527324001415

DOI: 10.1016/j.ijpe.2024.109284

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