Nowadays, customers are more involved with creating their ideal product. This increased customer involvement does not come without its challenges. One of the biggest challenges companies, that involve their customers in the product design, face is finding out what the actual need is of the customer. The reason why this forms such a great challenge, is because customers themselves often do not know what exactly their needs are and, if or when they know, they do not know how to clearly explain what their needs are. Therefore, designers create prototypes to try to get a better understanding of what their customer’s wants and needs are. This process, also known as collaborative prototyping, brings another challenge with it, which is the pricing of these custom designed prototypes.
Terwiesch and Loch (2004), take on an interesting perspective by raising questions with regards to what the optimal number of prototypes should be, who the responsible party should be for paying for the prototypes and how the prototypes and the final product should be priced. The authors also emphasize the importance of collaborative prototyping and that pricing differs per industry, e.g. how architects set up their pricing for their prototypes versus how an energy bar producer should set up their prototyping pricing (buyer- supplier collaboration). Additionally they also mention the importance of involving the customer with pricing and considering the customers individually. The model presented by Terwiesch and Loch (2004) relies on two ‘economic agents’ (buyer and supplier), with dissimilar information structures and objective functions. The authors also take heterogeneous customer valuation of design into account, which is an interesting touch and tries to makes their model more applicable to the real world, because even though the customers of certain companies might have some characteristics in common, their preferences will never be homogeneous and the differences should still be accounted for. The authors also really stressed the relevance of research in this domain, seeing how important the ability to customize products is nowadays and that it is considered to be ‘a skill and the flexibility of a craftsman from before the industrial revolution’(Terwiesch and Loch, 2004).
Despite the fact that Terwiesch and Loch (2004) discussed paragraphs in which they “proof” their theories, it can be argued that their arguments are still not enough and it still does not authenticate their statements/ theories. This is due to the lack of trial in a real life setting. The authors argue each and every theory based on their assumptions, which would have been fine if they had tested this in a real life setting and concrete evidence was presented, but unfortunately in this case they have not. Also, the authors have only taken customer-market settings into consideration in which the producer chooses the conditions of the contracts and in which the customer does not have the power to influence this. It would have been interesting to see what the differences in results would have been between these different market settings. By not taking this aspect into consideration, the model provided by the authors is also not generalizable to a different market setting than the one they have argued (customer-market setting, where the producers determine the conditions of the contract).
Another weakness of the article is that they have not taken competition into consideration. The authors also have not taken competition (or the intensity of it) into consideration. If there are enough rivals in a market, the degree in which the consumer can influence the conditions of the contracts increases. This occurrence would have had a significant influence on the results of this study.
A business model that is based on collaborative prototyping is not something very new, architects for example have worked with such model for a long time. However, an interesting take on a real life example, outside of the architecture business, of a company in which collaborative designing/ prototyping plays a prominent role is Ikea. Ikea allows her customers to design their kitchens, essentially creating a prototype, for free. The customer can either use their website feature or visit one of their locations. When it comes to pricing, Ikea already set its prices in a way that takes the customer into consideration. They look at what a customer is willing to pay for a certain product, and then start working backwards from the price (Van Asseldonk, 2016). The customer however, does not have a lot of leverage to negotiate on the price, however they can opt for cheaper materials. So in essence, there is also a certain degree of collaborative pricing present (Ikea, n.d.).
All in all, the article provides a stepping stone for future research and especially for markets in which the customers practices no to little influence on the conditions stated in the contracts. It is important for future researches to conduct actual research in an actual real life setting, otherwise all the statements and conclusions drawn from the research, just like this one, cannot be verified. For managers it is important to include their customers with the way they price their models and they should take a collaborative pricing model into consideration. Furthermore, it would be a good idea for companies that use prototyping in their usual business processes to reconsider their pricing structure. As explained in the article, sometimes it is better to offer a free prototype of a product so that you can better understand the needs of your customers.
-Ikea.com (n.d.). Retrieved from: http://www.ikea.com/
– Terwiesch, C., & Loch, C. H. (2004). Collaborative prototyping and the pricing of custom-designed products. Management Science, 50(2), 145-158.
– Van Asseldonk, E. (October 25th, 2016). ‘Ikea sets the prices of its products before they’re even designed’. Retrieved from: http://www.businessinsider.com/ikea-price-first-design-later-2016-10?international=true&r=US&IR=T