Designing Digital Rollovers: Managing Perceived Obsolescence through Release Times

Abstract

When releasing a new version of a durable product, a firm aims to attract new customers as well as persuade its existing customer base to upgrade. This is commonly achieved through a rollover strategy, which comprises the price of the new product as well as the decision to discontinue the sale of the existing product (solo rollover) or to sell the existing product at a discounted price (dual rollover). In this study, we argue that the timing of the new product release is an important—but commonly overlooked—third lever in the design of a successful rollover strategy. The release timing influences the consumers' perception of obsolescence, by which an existing product is considered obsolete merely by reference to a new product. This reinforces the upgrading behavior of existing customers, but it also necessitates deep discounts of the existing product to keep its sale viable in a dual rollover. We analyze the impact of the release timing on solo and dual rollovers in markets for digital goods (i.e., where production costs are negligible) that are composed of naive and sophisticated consumers. Under the assumption that both the old and the new product would offer a similar utility if there was no perceived obsolescence, we show that in both markets a firm selecting the release times from a continuous timeline can induce sufficiently large parts of its existing customer base to upgrade so that a solo rollover is optimal. We also characterize the resulting market segmentation, and we offer managerial as well as policy advice.