Mass Customization and Guardrails: 'You Can't Be All Things to All People'

Abstract

A mass customization (“customer as designer”) strategy enables a firm to yield a closer match between its products and customer tastes. A mismatch between those tastes and the delivered product implies a cost to the consumer. Rather than assume all products, other than the one purchased, are immaterial to the customer, we consider the brand-level issue of mismatch between customers’ tastes and the firm’s full range of products. To this end, we permit consumers’ utility to depend upon the distance between their ideal point and the limits of the firm’s product varieties, which we refer to as guardrail products. Mass customization can thus reduce product-specific “fit” costs yet exacerbate brand-level fit. In the absence of brand-level costs, the firm extracts maximal revenue from consumers by offering a range of varieties to cover all possible consumer tastes at a uniform price We show that considering a brand level cost implies that the firm should limit the breadth of the mass customization region to be less than full market coverage. More interestingly, we also find that the firm should optimally implement a differential pricing scheme for those product varieties at the outer extremes of its product line, catering to those consumers with more extreme tastes. Given that a continuum of prices will likely not be practical in application, we also consider the more pragmatic approach of a set of fixed (non-customized) products to serve customers at the taste extremes, with a corresponding set of (lower) fixed prices. We prove this heuristic solution performs close to optimal.