Professor Anton Ovchinnikov, who teaches Decision Analysis courses at the University of Virginia Darden School of Business, has designed a new model to help companies determine which consumers would choose the refurbished model. He describes it in his study, “Revenue and Cost Management for Remanufactured Products,” which appears online in the Production and Operations Management Journal.
Consumer behavior and associated demand cannibalization play a central role in a company’s decision to add remanufacturing to its business operations. According to Ovchinnikov, standard methodologies that rely on consumers’ willingness to pay (WTP) do not accurately determine how many consumers would switch from buying new products to used products. Ovchinnikov used surveys and consumer focus groups to show that a segment of consumers would prefer to stick with the new and more expensive product.
“For example, in one of the studies we found that at a 40 percent discount, 82 percent of subjects found the product’s price below their WTP. A traditional WTP-based approach would suggest that 82 percent of customers would switch to the remanufactured product,” Ovchinnikov says. “However, 39 percent of those respondents doubted product quality because of the low price and in the end only 43 percent made the switch.”
On a graph, Ovchinnikov represents this behavior as an inverted-U. His study shows that the company incorporating the inverted U-shape consumer behavior into their remanufacturing strategy remanufactures under broader conditions, charges a much lower price, typically remanufactures more units and has incremental profits from remanufacturing twice as high as the company that uses WTP alone.
“To profit from remanufacturing, companies need to carefully balance cannibalization of the new product’s sales with new demand that remanufactured products can attract from price sensitive consumers and overlay the two factors with the cost structure that is specific to a remanufacturing operation,” Ovchinnikov says.
Companies also need to weigh the number of remanufacturable used products that a company receives against the number of remanufactured products it wants to sell.
“The more used products (called cores) the company acquires, the cheaper it is to remanufacture a given number of units. A certain fraction of returns typically correspond to so-called ``false returns” for which no refurbishing is needed at all; the remaining units require some work and parts and are therefore more expensive.”
Ovchinnikov shows that companies may want to strategically capitalize on that dependency and collect more cores than they intend to remanufacture. Doing so could also further a company’s sustainability goals.
“The company incorporating the inverted-U model generally acquires more cores and remanufactures more units,” Ovchinnikov says. “This suggests that a better understanding of consumer behavior also has the potential to benefit the environment by diverting more items from the waste stream.”
In the future, Ovchinnikov will look at other aspects of remanufacturing electronics.
“It could be interesting to consider the introduction of remanufactured products as a mechanism to create/change product lines. For example, a $139 remanufactured version of a $399 smartphone could be cannibalizing not only the sales of this costlier device, but also the sales of the “regular” phones priced around $139. It could be that consumers who purchase refurbished smartphones are more likely to spend more on voice or data plans. Thus cannibalizing regular phone sales could in fact be profitable overall,” Ovchinnikov adds.
For more information, contact firstname.lastname@example.org
Abena Foreman-Trice | Newswise Science News
Win-win strategies for climate and food security
02.10.2017 | International Institute for Applied Systems Analysis (IIASA)
The personality factor: How to foster the sharing of research data
06.09.2017 | ZBW – Leibniz-Informationszentrum Wirtschaft
Salmonellae are dangerous pathogens that enter the body via contaminated food and can cause severe infections. But these bacteria are also known to target...
University of Maryland researchers contribute to historic detection of gravitational waves and light created by event
On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...
Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.
Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....
Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).
When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...
Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.
How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...
23.10.2017 | Event News
17.10.2017 | Event News
10.10.2017 | Event News
23.10.2017 | Life Sciences
23.10.2017 | Physics and Astronomy
23.10.2017 | Health and Medicine