Technological markets are characterized by growth patterns exhibiting a high degree of uncertainty that makes them exceptionally difficult to predict and forecast. In this course we examine the structure and growth patterns of such markets. We will demonstrate the power of word-of-mouth communication and why it is responsible for the fact that growth of new products is a slow process, even for successful products such as MP3 players; We will compute the value of the customers of E*Trade and Sirius|XM satellite Radio, appreciate why main market consumers aren't impressed with early market technophiles, explain why network goods are even slower to grow and demonstrate the fact that technological substitution is not getting faster, despite what we think of the generational shift between the oh-so eighties adopters of portable CD players and the hip generation of MP3 adopters.
The course is divided into the following main sections:
a)Diffusion & Adoption of New Products b)Valuing Innovations c)On Chasms & Saddles d)The Chilling Effects of Network Goods e)Diffusion of New Generations
In several meetings we use Excel programs in order to explain and empirically predict the growth of new innovations as well as technological substitution between different generations of the base technology. Small-World networks will also be used to demonstrate the power of networks as the means of spreading word-of-mouth to accelerate product growth. While the more technical aspects of the empirical work will be explained in details, students' general familiarity with Excel is assumed. Some of the articles are available for downloading at this site. Additional papers using complex systems analysis are available for downloading at the complex markets site.
a) Diffusion & Adoption of New Products
will it ever fly?
We construct the mechanism that describes and predicts the growth and diffusion of new hi-tech and consumer electronic products. In particular we discuss the power of imitation and word-of-mouth in the diffusion of innovative products. We look at examples of such growth patterns of household durables in the US and Europe, understand why the process is inherently slow and discuss the possibilities facing executives who wish to accelerate sales of these products.
Eitan Muller, Renana Peres and Vijay Mahajan: Innovation Diffusion and New Product Growth, Marketing Science Institute: Relevant Knowledge Series, 2009.
Christophe Van den Bulte and Stefan Stremersch, "Social Contagion and Income Heterogeneity in New Product Diffusion: A Meta-Analytic Test," Marketing Science, 2004.
Vijay Mahajan, Eitan Muller and Jerry Wind, New Product Diffusion Models, Kluwer Academic Publishers, 2000.
Peter Golder and Gerard Tellis, "Will it Ever Fly? Modeling the Takeoff of Really New Consumer Durables,"
Marketing Science, 1997.
b) Valuing Innovations
can you put a dollar value on your customers?
The growth of the Internet drove the offering of many new services, among them online banking, instant messaging, online payment services, or online brokerage services. Yet, different from durables, service customers and providers are often engaged in continuous relationships, a crucial aspect of which is customer attrition. We introduce customer attrition and defection into the growth structure of services and use this knowledge to estimate customer lifetime value (CLV) and long range customer equity of firms such as E*Trade, Sirius|XM radio, Barnes&Noble.com and Amazon.com.
Raghuram Iyengar, Christophe Van den Bulte and Thomas Valente, "Opinion Leadership and Social Contagion in New Product Diffusion, Marketing Science, 2010.
Sunil Gupta, Donald R. Lehmann and Jennifer Ames Stuart, “Valuing Customers,” Journal of Marketing Research, 2004.
c) On Chasms and Saddles
main market consumers aren't impressed with early market technophiles
We discuss the phenomenon of a temporary but deep decline in sales during the growth stage of the product-life-cycle and look at examples in the US consumer electronic market such as VCR's, Cordless Phones, CB Radios and DBS systems. We will understand why this sales pattern is a direct result of the dual market phenomenon that treats the early market adopters and main market adopters as sufficiently different to warrant differential treatment as two separate markets for marketing purposes. Methods of dealing with this growth pattern will also be discussed.
Deepa Chandrasekaran and Gerard Tellis, "Getting a Grip on the Saddle: Chasms or Cycles?" Journal of Marketing, 2011.
Christophe Van den Bulte and Yogesh Joshi, "New Product Diffusion with Influentials and Imitators," Marketing Science, 2007.
Peter Golder and Gerard Tellis, "Growing, Growing, Gone: Cascades, diffusion, and turning points in the product life cycle," Marketing Science, 2004.
Geoffrey A. Moore, Crossing the Chasm, New York: HarperBusiness, 1991.
d) The Chilling Effects of Network Goods
if you see the bandwagon - it's too late
Network goods are products that generate network externalities, or bandwagon effects, by causing the utility of the consumer who uses the product to increase as more consumers adopt the new product. We will see that contrary to common wisdom, bandwagon effects do not cause the acceleration of the growth process, but rather hold it back. Fax Machines, DVD Players, CD Players and CB Radios will serve as examples to the pattern of “hockey-stick” growth of network goods. We will also discuss the tools executives could use to reduce this delay and why advertising in particular is a powerful tool in such cases.
Gerard Tellis, Eden Yin and Rakesh Niraj, "Does Quality Win? Network Effects Versus Quality in High-Tech Markets," Journal of Marketing Research, 2009.
Stefan Stremersch, Gerard Tellis, Philip Franses and Jeroen Binken, "Indirect Network Effects in New Product Growth," Journal of Marketing, 2007.
Jeffrey Rohlfs, Bandwagon Effects in High Technology Industries, Cambridge: MIT Press, 2001.
e) Diffusion of New Generations
will it ever die?
Old products don't die. They are just replaced by a new generation of the technology that satisfies the same consumer needs more efficiently. We will highlight the difference between diffusion of the base technology and substitution of different generations of that technology. We will demonstrate these principles on four generations of IBM mainframes in the US and two generations of cellular phones in Europe in addition to the example of portable music players in the US. This will lead us to the discussion of the major issue of the acceleration of the diffusion of new technologies and new generations of the same technology base.
Christophe Van den Bulte, "New Product Diffusion Acceleration: Measurement and Analysis," Marketing Science, 2000.
John Norton and Frank Bass, "Evolution of Technological Generations: The Law of Capture,"
Sloan Management Review, 1992.
John Norton and Frank Bass, "A Diffusion Theory Model of Adoption and Substitution for Successive Generations of High Technology Products," Management Science, 1987.