Increasing Commodity vs Fixed Value
This Market Simulation explores how increasing only the Commodity value of Products will impact Prices.
Two Competitive Rivals are selling ‘Sprockets’ Product. The Sprockets are made up of two Features:
- a differentiating Orthogonal Feature (fixed value), and
- an undifferentiating Commodity Feature (rising value).
The value provided by the differentiating Orthogonal Feature is fixed. But the value of the undifferentiating Commodity Feature is rising for both Products. Hence the total value and Customer Willingness To Pay (WTP) of both Products is always rising. But Customers are still making their Purchase decision based upon the fixed but differentiating Orthogonal Feature.
This Market Simulation builds upon the earlier simulation: MO-113 Semi-Orthogonal Price War. In that case, the total Willingness To Pay (WTP) Customers had for the two Products was unchanged even as the user could vary the Commodity:Orthogonal ratio.
This Market Simulation demonstrates that when only the Commodity value of the Products is increasing (not the orthogonal Features that differentiate the Products) then the Customers quickly receive all the benefit of that increasing value. Prices do rise while there are still hesitant Customers waiting to enter the Market. But as soon as all Customers are buying and it is only a question of “which Product” then Prices flatten, and Revenue and Profitability plateau.
This Case Study provides provides a glimpse into the premium Market Optimization nodes. These premium nodes are not available in the Free Community Edition of Scientific Strategy. But a selection of problems that can be solved with the Free Community Edition nodes can be found in Case Studies and Market Simulation.
#1 Increase Commodity Value
- RivalA.Sprockets = Commodity Feature + Orthogonal Feature A
- RivalB.Sprockets = Commodity Feature + Orthogonal Feature B
Note that the Cost advantage that RivalA previously enjoyed has been eliminated for this Market Simulation.
#2 Market Simulation
The ‘Loop End’ node will collect the results from 21 iterations as the Mean Commodity value of the Products increases from $0 to $400.
The ‘Price vs WTP’ chart below shows how the total value of each Product is increasing rapidly while the Prices flatten. Prices and Profitability do increase as Competitors as Customers are still entering the Market, but soon the Customers are enjoying all of the benefit of increasing Product values.
Competitors are only truly rewarded when they develop Features that differentiate their Products.