On the evaluation of product customization strategies in a vertically differentiated market

This paper presents a formal approach to evaluate the value of enhancing product customization in a vertically differentiated market. Different from most existing studies that tend to associate the level of customization with the number of product variants, we take a rather different view to the level of customization which we define as the degree to which consumers are involved along the value chain. Consequently, a higher level of customization is achieved when consumers are involved further upstream in the chain. The novelty of our approach stems from the integration of both marketing‐ and production‐related factors that enable us to: consider trade‐offs between customization, lead times and manufacturing costs; and analyze how these trade‐offs should be addressed in a market in which one group of consumers is highly concerned about product customization, whereas the other group is more concerned about lead time. Through numerical examples, we demonstrate how the interplay between marketing‐ and operation‐related factors affects firm's decision on the most appropriate level of customization.