There are three different basic forms of product variety:
(1) Fit variety: Customers need to be able to buy different versions (sizes, shapes etc.) of a product if the product is to be of use for them (personal utility maximization). The more the characteristics of a product move away from the customer specifications, the less use it has for that customer. This kind of variability is also known as horizontal differentiation. Examples are different sizes of shoes or t-shirts, different locations of shops or airports and different departure times of trains or planes.
(2) Performance-based variety: Companies might sometimes offer products of more or less quality (e.g. a “high end” product and a “standard” product), so that customers can buy according to their quality needs and / or their financial abilities (price discrimination). This kind of variability is also known as vertical differentiation. Examples are computers with different processor speeds, mobile phones with different weights and diamond earrings with different diamond sizes.
(3) Taste-based variety: Customers also want products to come in different versions appealing to their personal taste in colour, design, sapidity etc. This kind of variability is the outcome of rather “rugged” individualistic utility functions with local optima and no clear common thread.
A company may therefore choose to aim for more variety for one of the following reasons:
- Their heterogeneous customer base does not accept “one size fits all”-products (taste-based variety)
- They want to make use of price discrimination mechanisms and offer different quality versions for different income groups (performance-based variety, market segmentation)
- Their customers actively demand more variety (e.g. by wanting to be offered a broad range of foods in a restaurant as opposed to being offered the same food every day)
- Saturating a niche and thus preventing competitors from being active in that niche
- Avoiding a direct price competition with competitors by product differentiation
These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.