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Home Ideas Library Is New Product Exclusivity Always a Good Idea?
10.13007/312
Ideas for Leaders #312
Is New Product Exclusivity Always a
Good Idea?
Key Concept
Having exclusive sales or distribution rights to a new product may sound like a
good deal. New research shows, however, that exclusivity can reduce profits,
especially if the firm does not have locked-in loyal customers, because it
eliminates the potential for greater word-of-mouth marketing.
Idea Summary
In 1995, Japanese telecommunications giant NTT agreed to distribute a new
product featuring new technology, but rejected the offer of exclusivity to the
Japanese market. Going against the conventional wisdom that the less
competition the better, NTT actually wanted more competition. The reason:
the product was unfamiliar and untested; as a result, the more customers
bought the product, even under a different brand, the more the product would
be accepted in the market — and thus the more of NTT’s brand of the product
would be sold. In short, cross-brand world-of-mouth would be more profitable
in the long run for NTT than exclusivity.
When AT&T was offered at least temporary exclusivity as the U.S. provider
for Apple’s early iPhone, its reaction followed the conventional wisdom: it
jumped at the chance to keep out competitors.
Which decision was the correct one? To explore this issue of product
exclusivity and cross-brand word-of-mouth (WOM), Renana Peres from
Hebrew University of Jerusalem and Christophe Van den Bulte from the
Wharton School conducted a simulation study manipulating a number of
different factors that would be relevant to the results, including:
Overlap in customer bases. In some markets, firms share a majority of the customers; in
other markets, a significant percentage of customers buy mostly or exclusively from a single
company or brand. Those customers are considered locked-in customers.
The structure of WOM. How much cross-brand WOM (e.g. for iPhones) and within-brand
WOM (e.g. for the Samsung Galaxy) exists in the market?
Length of exclusivity. In the simulation, exclusivity could last from 0 to 8 periods. Four
periods of exclusivity, for example, would mean that customers could only buy from the firm with
exclusivity for the first four periods the product was on the market, after which competitors
could sell the product.
The researchers expanded on the results of the simulation with a
mathematical analysis that explored issues such as price-sensitivity and sales
volume.
According to the results, both NTT and AT&T made the right decision
Authors
Peres, Renana
Van den Bulte, Christophe
Institutions
Hebrew University of Jerusalem
The Wharton School of the University of
Pennsylvania
Source
Journal of Marketing
Idea conceived
January 2014
Idea posted
January 2014
DOI number
Subject
Marketing
Sales Management and Strategy
because of the differences in the level of customer loyalty or customer lock-in.
The research shows that whether or not temporary exclusivity is profitable
depends to a large extent on the firm’s level of locked-in customers. Because
NTT had a high-level of locked-in customers, the word-of-mouth from the sale
of competitor products benefited NTT. Once its customers heard about the
new product, they turned to their telecommunications company of choice —
NTT — to buy the product. AT&T had a much lower level of loyal customers,
and as a result, WOM would have probably benefitted their competitors.
There would be no trade-off in profitability through the ‘social contagion’ of
word-of-mouth.
Even in markets with strong within-brand word-of-mouth (i.e. everyone’s
talking about a specific brand, not the product category), it is sometimes
better to forego temporary exclusivity. This is especially true for price-
sensitive customers. For example, when a second firm finally enters a market
for a product that had previously been sold exclusively by another firm, the
second firm has to dramatically lower prices to make inroads into the market
— a step that inevitably lowers prices for the entire market.
Exclusivity, in sum, is not an automatic benefit. The structure of the market,
the type of product (e.g. does it involve a new technology unfamiliar to
customers?), and the price-sensitivity of customers are some of the major
factors that must considered before any decision is made to accept, or forego,
exclusivity.
Business Application
The research offers clear, applicable lessons for decision-makers in a
number of different situations.
If you’re launching a new product, consider letting competitors enter
the market. The research shows that, counterintuitively, you can increase
your profits by letting competitors in on the action. Any resulting loss of market
share will be compensated by the increased or accelerated demand for the
product, depending on your level of customer lock-in.
If you’re a distributor, don’t automatically seek temporary product
exclusivity. Instead, as with product manufacturers, consider the potential
impact of cross-brand word-of-mouth on the product’s success. It should also
be noted that different types of products are going to benefit differently from
word-of-mouth. For example, a radically new product or technology needs
word-of-mouth to overcome the hesitation of customers to take a risk on the
product. Word-of-mouth is less important for low-risk products in mature
industries, and therefore exclusivity is desirable.
Don’t let benchmarking fool you. The concept behind cross-brand word-of-
mouth is that the rising tide lifts all boats. Measuring your financial
performance against competitors might hide the profits lost because
exclusivity tamped down word-of-mouth marketing.
Further Reading
When to Take or Forego New Product Exclusivity: Balancing Protection
from Competition against Word-of-Mouth Spillover. Renana Peres &
Christophe Van den Bulte. Journal of Marketing (forthcoming).
Further Relevant Resources
Renana Peres’s profile at the Hebrew University of Jerusalem
Christophe Van den Bulte’s profile at The Wharton School of the University of Pennsylvania
The Wharton School's Executive Education profile at IEDP
© Copyright IEDP Ideas for Leaders 2014
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