The Optimal Pace of Product Updates

Abstract

Some firms (such as Intel and Medtronics) use a time–pacing strategy for new product development, introducing new generations at regular intervals. If the firm adopts a fast pace (introducing frequently) then it prematurely cannibalizes its old generation and incurs high development costs, while if it waits too long, it fails to capitalize on customer willingness–to–pay for more advanced technology. We develop a model to gain insight into which factors drive the pace. We consider the degree to which a new generation stimulates market growth, the rate at which it diffuses (its coefficients of innovation and imitation), the rate of decline in its margin over time, and the cost of new product development. The optimization problem is non–concave; however we are able to solve it numerically for a wide range of parameters because there is a finite number of possible solutions for each case. Somewhat intuitively, we find that a faster pace is associated with a higher market growth rate and faster margin decay. Not so intuitively, we find that relatively minor differences in the new product development cost function can significantly impact the optimal pace. Regarding the Bass coefficients of innovation and imitation, we find that a higher sum of these coefficients leads to a faster pace but with diminishing effects, and that for relatively higher sums the coefficients are effectively substitutes.