One-to-one Marketing on the Internet

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1 Association fo Infomation Systems AIS Electonic Libay (AISeL) ICIS 1999 Poceedings Intenational Confeence on Infomation Systems (ICIS) Decembe 1999 One-to-one Maketing on the Intenet Rajiv Dewan Univesity of Rocheste Bing Jing Univesity of Rocheste Abaham Seidmann Univesity of Rocheste Follow this and additional woks at: Recommended Citation Dewan, Rajiv; Jing, Bing; and Seidmann, Abaham, "One-to-one Maketing on the Intenet" (1999). ICIS 1999 Poceedings This mateial is bought to you by the Intenational Confeence on Infomation Systems (ICIS) at AIS Electonic Libay (AISeL). It has been accepted fo inclusion in ICIS 1999 Poceedings by an authoized administato of AIS Electonic Libay (AISeL). Fo moe infomation, please contact

2 ONE-TO-ONE MARKETING ON THE INTERNET Rajiv Dewan Bing Jing Abaham Seidmann William E. Simon Gaduate School of Business Administation Univesity of Rocheste U.S.A. Abstact The Intenet povides unpecedented ability fo maketes to lean about thei customes and offe custom poducts at special pices. The technology, maketing, and economics of using the Intenet fo one-to-one maketing ae examined. We find that, unde vey geneal conditions, a selle can make highe pofits by adopting a mixed stategy of seving conventional segments with standadized poducts at a unifom pice and seving the diect maketing segment with customized poducts at diffeentiated pices. Supisingly, the selle can aise its pices fo both standad and customized poducts as customization and infomation collection technologies impove. The selle s best esponse to eduction in technology costs is to incease its customization effot at the expense of its standad poducts. 1. INTRODUCTION One-to-one maketing tuns the nomal concepts of maketing on thei head. While the focus of conventional maketing is to infom the potential customes about the poduct and help them make a selection, the focus of one-to-one maketing is fo the vendo to do the leaning instead. In one-to-one maketing, the vendo may lean about the customes desies and needs, build a pesonalized poduct fo each custome and sell it to him at a special pice (Pine, Peppes and Roges 1995). While this kind of maketing has been the nom fo business-to-business tansactions, the infomation gatheing and pocessing hudles have pevented the extensive use of this appoach in consume maketing. Utnil now, that is. The Intenet is beginning to change this calculus. The Intenet and consume tacking technologies allow selles to build a connection with specific households and individuals and to send a pesonalized message o poduct to a caefully selected audience (Hagel and Raypot 1997; MeKenna 1995). Such a one-to-one inteactive communication on the Intenet facilitates a leaning elationship between the selles and the customes, enabling lage-scale poduct design with ich individualized featues. Advanced manufactuing technologies such as flexible manufactuing systems (FMSs) and compute integated manufactuing (CIM) pemit selles to customize goods o sevices fo individual customes in high volume at elatively low costs. To illustate the value of one-to-one maketing, next conside an example of diect maketing of customized pesonal computes by Dell Computes. Rathe than ceate a few models of pesonal computes and maket them, Dell allows the customes to inteact with Dell via its web site, o off-line fo lage copoate puchases, to ceate a unique poduct. Dell then builds the pesonal compute on its special assembly lines whee the poduct is aleady identified with a paticula individual ode by a ba code. At each station, the subassembly added is dictated by the custome s choice. This kind of maketing, which cucially depends on the inteactivity of the Intenet, is changing the maketing of many consume poducts. Even fims (such as Compaq) that built thei eputation on deale distibution, ae changing. Levi Stauss diectly makets tailoed jeans ove the Intenet by successfully leveaging consume pefeence infomation. 93

3 Dewan, Jing, and Seidmann The impacts of electonic makets on a fim s poduct and maketing stategies have been examined empiically by Raypot and Sviokla (1994) and Bessen (1993). The impacts of educed buye seach cost on pice, allocational efficiency, and diffeent paties incentives to invest in electonic makets ae examined in Bakos (1997). Balasubamanian (1998) analyzes the competition between conventional etailes and diect maketes. Howeve, these eseaches do not examine the potential of the Intenet as an infomation-gatheing tool fo one-to-one maketing. The focus of ou pape is to study the impacts of educed costs of leaning custome pefeence on a monopoly selle s poduction and picing policy. The new Intenet technologies and maketing methods aise a numbe of questions: Who benefits fom one-toone maketing? Should fims that have the ability to customize also sell non-customized, mass maket items? We analyze these and othe simila issues using an economics model of the Intenet maketplace. In the following sections, we descibe the Intenet technologies used to lean about customes, using custome infomation fo maketing, and examine closely the stategies and benefits fom poduct customization. We build on the model of spatial competition in Salop (1979) by adding poduct customization. We show that when the selle is a monopolist, adopting mass customization and disciminatoy picing allows it to make highe pofits. Unde vey geneal conditions, the selle s optimal stategy is to povide customized poducts at diffeentiated pices while simultaneously poviding selected standad poducts at a unifom pice. As customization and infomation collection technologies advance, the selle should expand its sales of custom poducts and incease the pice of its standad poducts.. CUSTOMER TRACKING TECHNOLOGIES Though numeous tacking technologies and inteactivity, the Intenet povides the vendo a histoically unpaalleled oppotunity to lean about the custome and maket a custom poduct. These technologies fom the conestone fo selles to collect custome pefeence infomation on an individual basis. A desciption of some of these technologies follows. 1. IP addess of linking page. When a use clicks on a link on a page, the equest fo web esouce at the new site includes the IP addess of the site on which the page containing the link is hosted. This povides the makete with infomation that he may use to customize a maketing message. As an example, conside a consume who clicks on a link to an audio equipment etaile s site fom a web page of a magazine often ead by audiophiles. The equest sent by the use s bowse includes the URL of the magazine site. The etaile may choose to fist show pages with high-end audio equipment bundled with othe accessoies puchased by audiophiles.. Log page. Most seves maintain a log page. It contains a wealth of infomation that can be used on a eal-time basis to customize the offeings. Seves such as Micosoft s IIS allow the log to be in a elational database allowing easy data mining. The log contains a histoy of visits, pages viewed, time between esouce equests, etc., along with the IP addess of the equesto. 3. Use egistation and authenticated access: Many sites equie the use to log in and povide infomation such as demogaphics. Even if the site does not equie egistation, the billing o shipping addess identifies the specific aea in which the use esides and many maketing companies sell databases that allow a makete to glean aggegate statistics about the consume. 4. Cookies: Pesistent cookies ae small amounts of text, a few tens of bytes in each instance, that ae stoed on the bowse s had disk by a seve. The next time the use equests the same URL o visits the same site, the cookie placed by the seve is sent back to it. A seve cannot get a cookie that itself does not place. Futhemoe, the infomation contained in the cookie is an encapsulation, possibly just a database key o identifie that may be encypted, of the use s inteaction with that specific seve. Cookies may be used in a numbe of diffeent ways: automatic log-in upon visiting a site, shopping cats, custome identification fo customization, etc. Amazon, CDNow, and Banes & Noble ae just a few examples of companies that use cookies fo customization. 94

4 One-to-One Maketing on the Intenet 5. Collaboative Filteing: Some vendos combine use identification with a cleve fom of data mining to customize the appeaance of a web page o offe the custome poducts to puchase. A common fomat employed by Amazon and Banes & Noble (using Fiefly Technology) is to use the puchase histoy of a custome and othes to extapolate what a paticula custome might like to puchase. The custome s puchase histoy is compaed to find othes that have bought simila books. The books that many such othe simila customes have bought but have not been puchased by the custome in question become the ecommendation fo this custome. Maketing pofessionals commonly efe to the many decisions that go into maketing a poduct as the maketing mix. The maketing mix includes poduct design, pice, pomotion, and distibution. Infomation about the custome can be used to offe custom poducts (Dell), special deals on pices (book puchases by affinity goups such as the Linux goup), pomotions (banne advetising depends on seach tem on Yahoo), and distibution (diect Intenet sales channel). In this pape we focus on the new poduct customization and diffeentiated picing stategies enabled by the Intenet and custome tacking technologies. We next model an electonic maketplace and examine the value of customization in this setting. 3. USING CUSTOMER INFORMATION FOR PRODUCT CUSTOMIZATION As in Salop (1979), the basic setting is still a cicula maket of unit cicumfeence. A selle adopting customization is epesented by an ac along the cicle (see Figue 1) that epesents a continuous spectum of customized poducts fitting all buyes whose ideal tastes lie within that spectum. In Figue 1, the ac [L,R] is the selle s customized poduct spectum and also its diectmaketing segment. Fom hee on we will use the phases diect maketing segment and customized poduct spectum intechangeably. The two end points (L and R) of the spectum epesent the selle s poduct offeings in the conventional segments [A,L] and [R,B], i.e., those buyes not coveed by the spectum. Fo simplicity, we assume that buyes have complete poduct infomation and that no buye seach occus. A Diect Maketing L [ ] R Conventional B Buyes with heteogeneous tastes ae unifomly distibuted along the cicle with density one. Each buye has a unitay demand subject to esevation pice. The fit cost of buyes is t pe unit distance along the cicle. Ignoe selles fixed costs. Assume t > to ease analysis. Assume poduction of standad poducts demonstates constant etuns to scale and nomalize maginal poduction cost to zeo fo convenience of exposition. Customization entails an exta cost that depends on the scope of customized poducts. Assume existing technology allows a selle to povide a customized poduct spectum of length x at cost ax + bx, whee a, b > 0. Hee a is the maginal customization cost of poduct scope and b is the maginal cost of collecting buye infomation. We call x the selle s customization scope. Figue 1. A Selle s Maket Segments and Customization Scope L and R ae the two end points of the customized poduct spectum. Buyes in the left and ight conventional segments will choose L and R espectively. Customization scope measues the selle s manufactuing flexibility (a fim poviding a standad poduct has zeo manufactuing flexibility). Flexibility in manufactuing means the ability to econfigue manufactuing esouces so as to poduce diffeent poducts efficiently (Sethi and Sethi 1990). An obvious measue fo poduction flexibility is the volume of the set of poducts the system is capable of poducing (Chattejee et al. 1984). Hee volume can be expessed by the numbe of diffeent poduct types in the set (Bowne et al. 1984; Gewin 1987), if they can be counted, and if not, by the ange of sizes, shapes, etc. (Poth 198). The intoduction of flexibility into a manufactuing system equies high initial investments (Gupta and Goyal 1989). Fo example, a numeically contolled tuning cente costs $300,000 to $400,000 while an FMS installation can balloon to $5 million (Bobowski and Mabet 1988). The quadatic cost tem (ax ) in the customization cost function eflects the diseconomies of scope in manufactuing investment; customization becomes inceasingly difficult and costly as customization scope inceases. 95

5 Dewan, Jing, and Seidmann The technologies fo infomation collection and data mining discussed in the pevious section have constant etuns within a vey lage ange of numbe of buyes consideed. Fo example, the cost fo Dell to pocess each additional custom ode should not vay much. The linea tem (bx) captues the constant maginal cost of collecting buye infomation. We assume that the selle can only pice disciminate to the second degee, i.e., the selle decides on the offeings and pices and each custome picks his suplus maximizing poduct. Consequently, a selle poviding a standad poduct chages a single pice and a selle adopting customization sets a distinct pice fo each poduct vaiety he poduces. We conside thee cases next: Pue standadization: only a single standad poduct; Pue customization: only customized poducts; and Mixed stategy: the selle may offe both customized and non-customized poducts simultaneously. 3.1 Pue Stategies: Only Standad o Only Customized Poducts The case of poviding a single standad poduct has been well studied in the liteatue (Salop 1979; Tiole 1988). The monopoly pice is and pofit is. We next examine a selle s pofit unde pue customization. If the selle seves only the diect maketing segment with customized poducts, he can pice as high as buye esevation utility. The selle has to choose the customized poduct spectum length x to maximize his pofit:, 0 < 1. We find that the optimal length of the customized poduct spectum is and that the selle s pofit is. 3. Mixed Stategy: Both Customized and Standad Poducts As descibed in Figue, we assume that the cicula maket is not fully coveed and that buye esevation pice is sufficiently high to exceed the selle s highest pice in the diect maketing segment. The othe cases ae examined in Dewan, Jing and Seidmann (1999). The selle s total pofit is composed of two pats: the pofit fom the conventional segments, _ c, and the pofit fom the diect maketing segment, _ d. The selle can not pice disciminate in the conventional maket segments and chages a single pice p fo poducts L and R (see Figue 1). The length d of conventional segment [A,L] o [R,B] is detemined by the location of the buye who is indiffeent between buying and not buying. We have since p td = 0. The selle s pofit fom the conventional segments is. In the diect maketing segment of the electonic maket, the selle can obseve each buye s pefeence location and theefoe can povide tailoed poducts and then pice disciminate. To extact maximum suplus fom buyes in the diect maketing segment, the selle applies such a picing scheme: chaging the sum of the conventional maket pice and the buye fit cost of puchasing the closest conventional maket poduct (eithe L o R, depending on the buye s location). In othe wods, fo a buye located in the diect maketing segment at distance away fom the closest end point, the pice chaged is p + ty. This is the highest pice the selle can chage to pevent buye y fom switching to the conventional maket poduct. Unde this picing scheme, buyes in conventional segments [A,L] and [R,B] will choose poducts L and R espectively. This picing scheme eliminates abitage oppotunities among buyes. Figue shows the selle s maket segmentation and picing scheme. The selle s pofit fom the diect maketing segment is 96

6 One-to-One Maketing on the Intenet Resevation Pice Highest Pice Conventional Maket Pice Pice A L R B Left Diect Right Figue. Maket Segmentation and Picing in the Mixed Stategy Maket The fist tem in this fomulation is the pofit fom the diect maketing segment. The emaining tems ae the exta cost of poviding a customization scope of length x. The selle has to choose conventional maket pice p and poduct spectum length x to maximize his total pofit: Solving this poblem gives optimal conventional maket pice and optimal poduct spectum length The selle s total pofit is A non-zeo poduct spectum length equies When and the highest pice in the diect maketing segment, is less than (see Figue ). When and and we have and the selle pefes the mixed stategy to pue standadization since his pofit unde the mixed stategy, exceeds the pofit of poviding one standad poduct. When and selle pofit unde pue customization, is even less than the pofit unde pue standadization, Theefoe, the mixed stategy dominates both pue stategies of standadization and customization when the maginal customization cost is elatively high compaed with fit cost and maginal infomation collection cost and when maginal infomation collection cost is sufficiently low When and we have and pue customization dominates pue standadization and the mixed stategy When and pue standadization dominates pue customization and the mixed stategy. This esult is fomally stated as follows. 97

7 Dewan, Jing, and Seidmann Poposition 1. (A) When and the selle will adopt a mixed stategy of poviding both standad and customized poducts. The selle pice disciminates in the diect maketing segment (customization scope) of length and chages a unifom pice of in the two conventional segments of length each. The selle s total pofit is (B) When and the selle will poduce a single standad poduct, chaging a pice of and eaning a pofit of (C) When and the selle will poduce only customized poducts and choose a customization scope of setting pice at buye esevation utility and eaning a pofit of When and the highest pice in the diect maketing segment, is lage than, violating ou basic assumption in the beginning of section 3.. Intuitively, Poposition 1 says that when maginal customization cost is elatively high but maginal infomation cost is sufficiently low, poviding both customized and standad poducts is the optimal stategy. When both maginal customization and infomation costs ae elatively high, the selle s best choice is to povide a standad poduct. When infomation cost is elatively high but maginal customization cost is sufficiently low, the selle will choose to povide only customized poducts. Poposition 1(A) invalidates the common conjectue that customized poducts will completely dive out standad poducts in electonic makets. t + (8a Pofit 3t) t * ( b) t (8a 3t) 0 Figue 3. Monopoly Pofit as a Function of Infomation Gatheing Cost b We next analyze the manageial implications of the selle s optimal poduct and picing stategy based on Poposition 1(A). Unde pue standadization, thee is a significant deadweight loss due to buye fit cost. This deadweight loss is elieved unde the mixed stategy since a smalle conventional maket is seved because of a highe conventional maket pice. In contast, a pue customization stategy eliminates the deadweight loss of buye fit cost and allows the selle to extact full buye suplus in the diect maketing segment, but entails exta costs and leads to insufficient maket coveage, intoducing new souces of inefficiency. The mixed stategy inheits the vitues of both pue standadization and pue customization and compomises thei dawbacks. Selle pofit is a deceasing function in a and b. As technologies advance, a and b will decease and selle pofit will incease (see Figue 3). The selle will espond to technological advances by both aising conventional maket pice and expanding customization scope. Raising the conventional maket pice entails a sales and pofit loss in the conventional segments, but the selle can chage a coespondingly highe pice in the diect maketing segment. In fact, the selle will delibeately seve smalle conventional segments and a lage diect maketing segment. Consistent with intuition, the focus of the selle s mixed stategy will shift towad moe customization as technologies impove. 98

8 One-to-One Maketing on the Intenet Pofit π = t ( b) + (8a 3t) In Figue 4, we see that the selle s pofit fist deceases and then inceases as fit cost t inceases. The eason is as follows. As t deceases, poduct pices will decease, the conventional segments will expand and the diect maketing segment will contact. When t is close to, the selle s pofit gain in the conventional segments dominates the pofit loss in the diect maketing seg-ment. As t inceases, pices will ise and the selle will cove smalle conventional segments and a lage diect maketing segment. When t is close to the selle s 0 4a 3( b) t pofit gain in the diect maketing segment exceeds his pofit loss in the conventional segments. The intuition is that, when fit cost is small, the selle will exploit the conventional segments moe than the diect maketing segment, and vice vesa when fit cost is lage. The selle s conventional maket pice is highe than the monopoly pice of poviding one standad poduct. Figue 4. Monopoly Pofit as a Function of Fit Cost The atio of the diect-maketing segment size to the total size of the conventional segments is When and we obtain an uppe bound on this atio: v < 1. The selle seves customized poducts to less than half of his total maket. This atio inceases as a and b decease. As technologies advance, the selle will povide customized poducts to an inceasing faction of its maket. The selle s total maket size, as measued by will incease as a o b deceases. The net effect of adopting mass customization and pice discimination is highe maket powe and pofit fo the monopoly selle. As technologies advance, existing buyes in both conventional and diect maketing segments ae wose off since pices will all incease, but the buyes oiginally piced out of the maket will gadually join the conventional segments. It is not obvious how aggegate buye suplus changes with a and b. The total buye suplus is When and we have and. Theefoe, total buye suplus will decease when a o b deceases and buyes, as a goup, will be wose off when customization and infomation collection technologies advance. The selle benefits fom diffeentiated picing in the diect maketing segment. The advantage of picing flexibility in electonic makets can be seen diectly fom Figue. Whateve the conventional maket pice is, the tiangle aea in the diect maketing segment epesents the exta suplus that the selle can extact fom those buyes. To quantify the advantage of pice discimination in electonic makets, we next compae it with the situation in which the selle does not pice diffeentiate among buyes. The selle chages a single pice p on all maket segments and chooses customization scope x to maximize his pofit: 99

9 Dewan, Jing, and Seidmann Solving this poblem we obtain the optimal pice and customization scope The selle s optimal pofit is The pofit pemium of pice discimination is When o we obtain and Theefoe, poviding one standad poduct (Salop 1979) is a limiting case of ou model when customization cost is pohibitively high o when infomation collection cost appoaches its uppe limit, Fo the selles to adopt mass customization, maginal infomation collection cost must be sufficiently low The late 1970s and ealy 1980s aleady witnessed significant pogess in customization technologies such as FMSs and CIM. Howeve, mass customization had been pimaily applied to industy goods but neve became a majo poduction pactice fo consume poducts. One key baie was the cost of collecting pefeence infomation fom individual buyes, which had been too high fo mass customization to be moe pofitable than mass poduction of standadized poducts. As we have seen, educed costs of leaning and customization povide selles with new maketing oppotunities in electonic makets. Even though collecting buye infomation and mass customization entail highe costs than taditional mass poduction of a standad poduct, pesonalized tageting and pice discimination enabled by electonic makets may still allow selles to make highe pofits. Theefoe, the selle has the incentive to adopt diect maketing and mass customization by leveaging infomation technologies to his best advantage. 4. CONCLUSION AND FUTURE EXTENSIONS As a supeio communications channel, the Intenet has the unpaalleled capability to enable eal-time infomation exchange between buyes and selles, facilitating a new leaning elationship between these two communities. Coupled with matuing flexible manufactuing technology, consume pefeence infomation obtained via the Intenet is usheing selles into a new one-toone maketing paadigm of mass customization and pice discimination. It is tue that the educed buye seach cost shifts maket powe to buyes, but the educed selle leaning cost may also shift the maket powe back to the selles. As we have shown, a selle adopting customization can chage moe fo the pesonalized poduct featues, since emoval of fit cost inceases buye s esidual willingness to pay. We identify the conditions unde which a selle will benefit fom exploiting such diect maketing advantages as eadily available buye pefeences, fine maket segmentation, and picing flexibility endowed by the Intenet. In paticula, we find that the selle will adopt a mixed stategy of poviding both customized and standad poducts when the maginal customization cost is elatively high and the maginal infomation collection cost is sufficiently low. It is counteintuitive that the selle adopting customization should opeate as a quasi diect makete and also povide standad poducts at the edges of his customization scope. Howeve, the advantage of customization can not be fully exploited without pice discimination. We devise an optimal piecewise linea picing scheme eflecting second degee pice discimination, unde which the selle can eap the maximum benefit fom customization. Compaed with a selle poviding a standad poduct, the selle adopting customization will pice highe and cove a lage maket. This esult suppots the popula belief in the pess that mass customization allows the selle to sell moe 100

10 One-to-One Maketing on the Intenet and chage moe. When customization and infomation collection technologies advance, the selle should expand his customization scope and aise his standad poduct pice. The selle s maket coveage and pofit gow while total buye suplus suffes. One immediate extension to ou cuent wok is to study selles poduct and picing stategies in a competitive maket using a simila modeling famewok. Anothe potentially fuitful extension is to elax an implicit assumption in this pape that customization geneates pefect poduct fit. Customization-based poduct competition then becomes vetical and selles compete on the degee of poduct fit. 5. REFERENCES Bakos, Y. Reducing Buye Seach Costs: Implications fo Electonic Maketplaces, Management Science (43:1), Balasubamanian, S. Diect Makete vs. Retaile: A Stategic Analysis of Competition and Maket Stuctue Mail vs. Mall, Maketing Science (17:3), Bessen, J. Riding the Maketing Infomation Wave, Havad Business Review, Septembe-Octobe, Bobowski, P. M., and Mabet, V. A. Altenative Routing Stategies in Batch Manufactuing: An Evaluation, Decision Sciences (19:4), Fall Bowne, J.; Dubois, D.; Rathmill, K.; Sethi, S. P.; and Stecke, K. E. Classification of Flexible Manufactuing Systems, The FMS Magazine, Apil, Chattejee A.; Cohen, M. A.; Maxwell, W. L.; and Mille, L. W. Manufactuing Flexibility: Models and Measuements, Poceedings of the Fist ORSA/TIMS Special Inteest Confeence on FMS (Ann Abo, MI), K. E. Stecke and R. Sui (eds.), Amstedam: Elsevie, Dewan, R.; Jing, B.; and Seidmann, A. Maket Segmentation, Customization, and Picing Stategies in Electonic Makets, Woking Pape, Simon School of Business, Univesity of Rocheste, Rocheste, NY, Gewin, D. An Agenda fo Reseach on the Flexibility of Manufactuing Pocesses, Intenational Jounal of Opeations and Poduction Management (7:1), Gupta, Y. P, and Goyal, S. Flexibility of Manufactuing Systems: Concepts and Measuements, Euopean Jounal of Opeational Reseach (4:), Novembe, Hagel, J., and Raypot, J. The Coming Battle fo Custome Infomation, Havad Business Review, Januay-Febuay, McKenna, R. Real-Time Maketing, Havad Business Review, July-August, Pine II, J.; Peppes, D.; and Roges, M. Do You Want to Keep You Customes Foeve? Havad Business Review, Mach- Apil, Poth, J-M. La flexibilite des systemes de poduction: les evolutions possibles, Revue Fancaise de Gestion, Mach-May, 198. Raypot, J., and Sviokla, J. Managing in the Maketspace, Havad Business Review, Novembe-Decembe, Salop, S. Monopolistic Competition with Outside Goods, The Bell Jounal of Economics, Sethi, A. K., and Sethi, S. P. Flexibility in Manufactuing, The Intenational Jounal of Flexible Manufactuing Systems (:4), July, Tiole, J. Theoy of Industial Oganization, Cambidge, MA: MIT Pess, 1988, pp

11 Dewan, Jing, and Seidmann Appendix Table of Notations a: coefficient of diseconomies of scope in manufactuing b: infomation collection cost pe custome; d: the size of each conventional segment; p: conventional maket pice; : buye esevation utility; t: fit cost ate; u: total buye suplus; v: the atio of the diect maketing segment size to the total conventional maket size; x: the length of customized poduct spectum o diect maketing segment; y: the distance between a buye and the conventional maket poduct close to him; _ c : selle pofit fom the conventional segments; _ d : selle pofit fom the diect maketing segment; _: total selle pofit. A: the bounday of the left conventional segment; B: the bounday of the ight conventional segment; L: the standad poduct fo the left conventional segment, also the left end point of the customized poduct spectum; R: the standad poduct fo the ight conventional segment, also the ight end point of the customized poduct spectum; 10