Integrating marketing strategies for durable products into the product development process
Research by Sumitro Banerjee, Associate Professor of Marketing and Ferrero Chair in International Marketing, ESMT
In 1994, Sony entered the market and became the market leader with the Playstation (PS), followed by the even more successful Playstation 2 (PS2) in 2000. PS2 offered improved user benefits, such as, internet connectivity and an inclusive DVD player. As Sony was new to the video console market, it is possible that purchasers of the first PS may not have foreseen the launch and benefits of the PS2 when making the decision to buy the PS. When a firm develops new product versions, by improving quality or performance over time, sales of a first-generation product often hinder the profitability of subsequent versions. Consumers who buy the first-generation product will have a lower willingness to pay for a new generation of the same product because they already have a functioning product.
In order to better understand how the product development capability (PDC) of a company impacts upon the marketing strategy for the launch of a new durable product, such as a games console or smartphone, Sumitro Banerjee, Associate Professor of Marketing and Ferrero Chair in International Marketing at ESMT, researched the phenomenon. The results have been published in the research paper “Product Development Capability and Marketing Strategy for new Durable Products” in the September issue of the International Journal of Research in Marketing.
The research, which is based on an analytical model of such a market, shows that a firm’s marketing strategy is highly predicated by its ability to develop new generations of the product efficiently, i.e., higher quality at a lower cost. The optimal strategy for firms with a high PDC revolves around selling their current products and reselling their new generations of products to the same target segment – the high end of the market. This may explain why well-known makers of high end consumer electronics (such as Sony, Apple, and Royal Philips Electronics) make ongoing investments in product development to develop new generations on a regular basis.
In contrast, the optimal strategy of firms with a low PDC is to focus on expanding the market after serving the high end of the market with their early generations of products. Because firms with a low PDC improve their products less over time, they expand the market over time to optimize profitability. This strategy sometimes leads to “market inversion,” where consumers at the high end of the market consume the early version of the product, while those at the low end of the market consume the later improved versions.
This research shows that PDC has a significant impact on the marketing strategy that a firm adopts to launch a product in a market where there is significant diversity with regard to consumers’ valuation of product performance. In general, firms develop their marketing strategies after products have been developed. After all, why spend time developing a marketing strategy for a product that is not yet ready? Our analysis shows that this approach to product development and marketing is not optimal. When a firm develops sequential generations of a durable product for a heterogeneous market, our study underscores the benefits of utilizing an integrated approach for these two activities.