Optimal product design and pricing decisions under “do‐it‐yourself” service introduction in the retail channel

Abstract Enhancing consumer experience is a critical driver for optimizing the efficiency of retailing services, with the “do‐it‐yourself” (DIY) service emerging as a strategic cornerstone in retail channels. To address this, this study examines the challenges of product design, pricing, and revenue management associated with the integration of DIY services in a typical retailing channel using a game‐theoretical model. In the model, the manufacturer determines whether to offer DIY products and the extent of consumer participation, taking into account consumer preferences and the channel power structure, while also establishing the wholesale pricing of both existing standard products and newly introduced DIY products. Concurrently, the retailer sets the retail pricing of both products. The analysis reveals that the introduction of DIY products, which require active consumer involvement, generates mutual benefits for both the manufacturer and the retailer. However, when the retailer holds dominant power in the channel, the value of introducing DIY products diminishes for the manufacturer, as well as for the overall channel efficiency. To address this, the retailer can incentivize the manufacturer to enhance consumer participation in DIY products through targeted subsidies, thereby improving the efficiency of the entire channel. Furthermore, this study proposes tailored subsidy schemes under varying conditions.