Product Demonstrations & Price Competition
Do consumers always benefit from more information?
This essay is based upon a recently accepted paper, “Demonstrations and Price Competition in New Product Release,” which will appear in the journal Management Science. Other contributors include Raphael Boleslavsky of the University of Miami in Florida and Christopher S. Cotton of Queen’s University in Kingston, Ontario, Canada.
How do consumers know a new product will meet their needs? Does it replace a handy, much used product, or does it solve a problem that consumers never knew they had? How much information do consumers need to answer these questions?
When a new product is released, consumers face uncertainty about how well the product will meet their needs. To educate them, companies might offer free samples, in-store trials, access to reviews and consumer reports, or other opportunities to persuade consumers to try the new product. Return policies and money-back guarantees may also entice consumers to take the plunge and purchase, knowing they have recourse if it doesn’t suit them.
Sometimes a hands-on approach is best. As Apple allows full access to its products in the curated environment of the store, other companies design displays and interactive trials, either for their own stores or for retail chains. Similarly, wineries or other food producers visit grocery stores to offer samples of their products. Automakers offer test drives. Software companies offer trial periods. These opportunities, which we call “demonstrations,” can vary.
Our research shows that if prices in an industry change frequently, then these highly informative new product demonstrations are a good way to boost the bottom line. But if prices change infrequently, then more controlled product demonstrations may be a better call. It is not evident if customers are better off gaining more information, or if that benefit is offset by the higher price they may pay for the product.
Our analysis involved a game theory model to find answers. Our results showed that in industries where prices fluctuate often, innovating firms are better off making their product demonstrations as informative as possible. Doing so sharpens the differences between old and new products in the minds of potential consumers. The market is impacted in two ways. Even though this may actually reduce the number of people who are interested in the new product, it boosts the perceived value for it amongst those who want to buy.
Although demonstrations may lead some consumers to realize that a new product is not for them, the potential loss in market share is offset by the new customers the demonstration will attract.
Product demonstrations can also lead to “market division,” which allows firms to target different market segments, thus weakening competition. Market division reduces incentives that competitors have to cut prices in response to the entry of the new product into the market place. This can potentially negatively affect consumers as they gain more information about the product offering but end up paying higher prices for it.
Haresh Gurnani is the Benson-Pruitt Professor of Business, area chair, and executive director, Center for Retail Innovation at the Wake Forest University School of Business.
To learn more about the center, visit http://business.wfu.edu/cri.