Pricing and operations planning for new product launch: Introducing adopters’ variant willingness to pay

For sustainable profit, growth and competitiveness, firms dedicate significant resources to development and launch of new technologies. Setting the right price for these innovations is an enormous challenge, which requires (i) a clear understanding of the social interaction influencing adopters’ purchasing decisions, and (ii) coordinating marketing and operations so that products are available and affordable for adopters, especially for those who are more resistant to higher prices as the innovation moves through its life cycle. Building on this, we study the joint pricing and operations planning of firms when launching a new product in a market where adopters’ willingness to pay decreases over time. We combine and extend the traditional Bass model for diffusion and lot-sizing problems to price-sensitive demand settings and propose a method for tactically planning inventory management when the demand is characterized by different adopters’ behavior. As the resulting formulation suffers from non-linearity, we propose an efficient linear approximations-based methodology for price/diffusion relationships. Our numerical experiments provide insights about (a) threats which imperil firms when launching new products, (b) negative consequences of ignoring distinct behavior of different adopter categories, such as cash flow problem, and (c) threats resulting from shortening the product life cycle. We also show that ignoring such heterogeneity can blur the financial returns from launching new products and thus affect the commercial success of innovations.