2008 Headlines
Vithala Rao Finds New Product Preannouncements Reduce R&D Risks and Increase Future Marketing Success
Corporations Leak Information to Signal Intentions to Customers and Competitors
June 16, 2008 | Ithaca, NY | New product preannouncements reduce the risk of product development failure and increase marketing success, according to a new study by researchers at Cornell University's Johnson School of Management.
The paper, "New Product Pre-Announcement as a Signaling Strategy: An Audience-Specific Review and Analysis" was written by Meng Su, Assistant Professor of Marketing at Guanghua School of Management at Peking University and Vithala R. Rao, Deane W. Malott Professor of Management and Professor of Marketing and Quantitative Methods at Cornell's Johnson School of Management. The paper has been accepted for publication in the Journal of Product Innovation Management.
Advance information on new products such as Boeing's 787 Dreamliner passenger plane to Apple's iPhone to MicroSoft's Vista operating system are in such demand from media, customers and even competitors, that strategic preannouncements can have major financial impacts on products' overall return on investment and future sales.
"Our findings indicate that preannouncement marketing strategies reduce the risks associated with not only new product development but also product marketing failure because the market feedback may be valuable for the final product design or pricing strategy," said Rao. "Preannouncements can help firms uncover customer preferences, and more importantly, influence these preferences to their advantage before the preferences are molded in the customers' minds. The signal receivers update their beliefs about the new product launch time and quality after the preannouncement."
In general, the benefits of new product preannouncements (NPP) include creating demand for the new products, providing early information of innovative features to customers or distributors, helping firms to test new product designs and prices, forecasting future market potential, reducing customers' costs of switching to the new products, and deterring entry of competitors.
"But there are costs and risks of NPP including information spillover, cannibalization to the firm's existing products, risk of losing credibility if unable to launch as preannounced, retaliatory action from competitors, and risk of antitrust litigations," Rao said. The researchers note that when making these decisions, a firm must consider uncertain factors such as: (1) final attributes of the new product, (2) when the new product will be available, (3) how to respond effectively to customer inquires about the new product, and; (4) final pricing, promotion, and distribution decisions.
Due to customers' withholding of their purchases of the existing products, the dominant firm incurs considerable losses in pre-announcing the new product. In contrast, companies with low market share have little risk and much to gain because the pent-up demand comes mostly from the competitor's market share. A firm's reputation and credibility also affect NPP decisions because the influence on customers' buying behavior is determined by the perceived credibility and reputation of the firm.
"We find it is better for firms with lower credibility to preannounce later or not to preannounce at all because customers will be skeptical about the firm and the announcement," Rao said.
The researchers offer guidelines for managers and industrial decision-makers on when to preannounce for different firms in varying industries, including:
? Firms with significant customer switching costs, should preannounce earlier.
? If there is a long lead time for customers to learn to operate the new product, the NPP should be earlier.
? If the product is deemed to be highly profitable, the NPP should begin earlier.
? In fiercely competitive markets, NPP should be implemented later.
? If the new product cannibalizes an existing product, the NPP should be later.
? Firms with lower credibility should preannounce later or not at all.
