Product Design in Price-Competitive Markets: A Case Study of a Skin Moisturizing Lotion Miguel Bagajewicz, Season Hill, Amanda Robben, Heyde Lopez, Monica Sanders, Erin Sposato, Curtis Baade, Shamara Manora, and Juliana Hey Coradin School of Chemical, Biological and Materials Engineering, University of Oklahoma, Norman, OK 73019 DOI 10.1002/aic.12242 Published online May 12, 2010 in Wiley Online Library (wileyonlinelibrary.com). In this article, we apply a recently developed method for product design to the for- mulation of skin lotions and extend its application to consider price-competitive mar- kets. The method is based on the use of consumer preference functions that are in turn parameters of price-demand relations. These relationships are then embedded in a business model that aims at determining the optimal lotion formulation from the profit- ability point of view. The model allows to distinguish the formulation that leads to the consumer most preferred skin lotion from the most profitably one in a quantitative fashion. In the latter case, the selling price is also determined simultaneously with the optimal formulation. The example analyzed shows that the consumer most preferred lotion is not profitable, whereas a slightly less preferred lotion is very profitable. We then extend the new product design procedure to consider a competitive environment in which prices of all competitors, change dynamically until equilibrium is established. V V C 2010 American Institute of Chemical Engineers AIChE J, 57: 160–177, 2011 Keywords: product design, micoeconomics, lotion Introduction Product design requires the collaboration of marketing experts and engineers. Although marketing experts identify consumer needs and wants (we call them consumer preferen- ces here), engineers try to advance a formulation that will ac- complish some of these needs and wants in a profitable way. In other words, the needs and wants are not always fully met by the products marketed to these consumers. These needs and wants are usually expressed using consumer-related prop- erties (like effectiveness, thickness, smoothness, etc., in the lotion design case), which are expressed in terms of measures that are not sometimes the same as the ones used by engi- neers to describe the product. For example, effectiveness of a skin moisturizing lotion is usually expressed by a consumer by some measure of reduction of the number of scales pro- duced in a certain period of time, or certain skin feel after a given time, whereas the engineer, who knows what chemicals are responsible for the dry skin and for desquamation will connect effectiveness to the concentration of these chemicals at certain depths of the skin and then will be able to target the right level of these chemicals in the final product. As stated, just trying to match all consumer needs and wants to the full extent may not lead to a successful design because often such a product is unprofitable. To address the identification of the right level at which consumer preferen- ces are to be matched, together with the price at which the product ought to be sold so that maximum profit is achieved, a procedure that considers all these elements together was recently developed. 1 The method proposes to use microeco- nomics models to make the connections between consumer preferences, product price and product structure, composi- tion, and/or functionalities. Alternative product design procedures, like the one pro- posed by Cussler and Moggridge 2 or Seider et al., 3 advocate the identification of consumer needs first using them as tar- gets for the product design considering profitability and con- sumer response to price later. Bagajewicz’s 1 methodology Correspondence concerning this article should be addressed to M. Bagajewicz at bagajewicz@ou.edu. V V C 2010 American Institute of Chemical Engineers 160 AIChE Journal January 2011 Vol. 57, No. 1