Markets are often in a process of emergence, when new potential customers develop, driven by product and/or price improvements offered by suppliers, as well as by political, economic, social or technological change (“PEST”) factors. This customer development process has important implications, especially for type-1 rivalry.
Figure 1 shows market development for the consumer electronic device discussed in Briefing 46; a durable product that customers upgrade or replace – with a competitor (solid lines) and without (dashed lines). When building the market on our own, we capture nearly 300000 customers after five years, and enjoy monthly sales of 29000 units per months. We might expect that the presence of a competitor is entirely bad, depressing our sales throughout the market’s emergence – but this is not the case, because the competitor helps develop the potential market that we both then exploit. Figure 1 looks at advertising as the mechanism that brings this about, but other factors, such as price reductions and improved product performance, would work similarly.
Figure 1: Impact on type-1 rivalry of advertizing bringing new customers more quickly into a market. (Click image to view larger)
Adding a competitor brings the development of potential customers forward in time, allowing the two suppliers to capture over 75 % of the available market by the end of year five. Although our sales rate finishes at 20000 units per month, rather than 34000 when no rival is present, the presence of a competitor actually increases our sales during much of the period, compared with what sales would have been without a rival. Our sales only fall below the no-rival case in year five, when the remaining potential is mostly used up.
So:
Competitors can help grow our sales in fast-growing markets
But beware !! Figure 1 showed both competitors advertising at the same rate throughout the 5 years, which is rarely the case. If we do all the marketing in the early years, we could easily build potential demand, only to find that competitors come in later and take the sales from those emerging customers.
Until next time…
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Adoption costs
Emergence and development of customers may be held back, even when the product or service is functionally and economically attractive, due to adoption costs. Adoption costs effectively move the threshold of affordability to a higher price level, so that although customers may be able to afford the regular costs of owning a product, they cannot afford to acquire it. Cellphone services have been a widespread example, with the initial cost of handsets being a substantial barrier to the rates at which new subscribers can be won. Service providers therefore decided very early on to cut the adoption-cost barrier by subsidizing the handset in return for higher monthly charges. Likewise, many of us would like to own a Lexus or BMW, and could perhaps afford to run such desirable vehicles but cannot afford the capital cost of purchase, so finance plans are offered as a way of reducing or eliminating the adoption cost barrier. Some companies go so far as to make adoption costs negative, effectively bribing customers to take their product. Banks, for example, offer cash to customers opening new types of account that they are keen to promote.
This briefing summarises material from chapter 7 of Strategic Management Dynamics, pages 443-448.
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