When investing in Research & Development (R&D) companies sometimes make the mistake of targeting Customers whom they can never satisfy. At the same time, they divert investment away from core Customers.

While this is somewhat obvious, the mathematical impact of this flawed investment strategy on the company’s Willingness To Pay (WTP) Customer Distribution curve is not.

When Product R&D investments target those Customers on the lower (left) side of the WTP curve it lifts the Willingness To Pay of those Customers and pushes them to the right. But if, at the same time, Product R&D investments neglect those Customers on the upper (right) side then the Standard Deviation (SD) of the whole WTP curve will shrink. That is because both Customers on the left and right will move closer to the middle.

Shrinking Standard Deviation (SD) means shrinking a Product’s Strange Differentiation. This can have a very negative impact on sales and profitability.

This Case Study provides a high-level overview of the workflow without detailed explanation. It assumes you are already somewhat familiar with KNIME and Market Simulation. If not, start by reviewing the Building Blocks and Community Nodes.

In the previous workflow, BB-151 Selling an Inferior Good with Strange Differentiation, George Jetson discovered that adopting a Niche Market strategy was more successful than adopting a Me-Too strategy.

Jetson Gears is now catching up with the market leaders Spacely Sprockets and Cogswell Cogs. To drive growth, George Jetson decides to devote all of his R&D to satisfying the needs of those Customers who are most unsatisfied with his Product. In the meantime, Spacely Sprockets and Cogswell Cogs expend the same total amount of R&D but raise the Willingness To Pay (WTP) of all Customers evenly.

The Competitors are defined in the Table Creator (#1) node. Our two incumbent Competitors again are:

1. Spacely Sprockets
2. Cogswell Cogs

Both Competitors sell differentiated “Sprocket” Products that they manufacture for a Marginal Cost of $50 and sell for a Price of $150.

The Mean and Standard Deviation (SD) of the Customers Willingness To Pay (WTP) for the incumbents’ Sprockets is the same (Mean = $100 and SD = $40). So these Products are not Vertically Differentiated but they are Horizontally Differentiated.

When George Jetson enters the Market he develops a Niche Product that targets specific Customers. The Product he develops has a relatively low overall Mean WTP of $70. But he ensured that targeted Customers value the Jetson Gears Product more highly by setting the Standard Deviation (SD) of the Customer WTP curve at $50 (above the incumbents SD of $40). This is the source of the Product’s Strange Differentiation.

Strange Differentiation

The Strange Differentiation of Jetson Gears is measured using the Standard Deviation (SD) of the WTP curve.

George Jetson ranks all of his current and potential Customers based upon their WTP from “Love Me” (Rank = 1) to “Hate Me” (Rank = 10,000). He then uses that ranking to determine how to allocate his R&D investment.

George Jetson’s R&D budget is $10 per Customer on average. But for Customers who hate his Product he allocates a double (2.0x) investment ($20) while for Customers who love his Product he allocates a zero (0.0x) investment.

Spacely Sprockets and Cogswell Cogs also have an average R&D budget of $10 per Customer. But in their case, they allocate that budget evenly across all Customers – regardless of what they love, hate, or purchase.

Bottom-10 Customers

On the other hand, the Customers who hate Jetson Gears the most receive up to a 2.0x investment ($20).

George Jetson’s R&D investment strategy is a disaster, with Market Share, Revenue, and Profitability all dropping within a Market that is expanding. The cause of this drop can be attributed to the Product’s declining Strange Differentiation.