Timing and Marketing Mix Decisions Under New Product Diffusion With Dual-Market Structure and Repeat Purchases

Abstract

Over the last three decades, the success rate for new products in the marketplace has been one in ten. Although this rate has been increasing slightly in recent years, it is still below 30% as of the end of 2021. The lack of a significant market to adopt the product is considered the leading cause of the failure. It has been established that newly introduced products in the marketplace encounter early adopters before they are accepted by main adopters, the larger market. The time-to-market to introduce the new product to the main adopters emerges as a pivotal decision to achieve higher demand and traction levels, as they represent a larger population with respect to the early market size. Previous research reports that the transition from the early market to the main market is challenging due to the heterogeneity in the adoption attributes of the two segments, which could lead to sales slowdowns if not foreseen and planned previously. Although product managers leverage pricing and advertising to help their products cross the slowdown and successfully diffuse to the main market, price declines and market penetration could negatively influence this transitional process. Consequently, several trade-offs arise when planning a new product introduction in a dual-market structure, given the two markets' heterogeneity. For instance, delaying the

time to enter the main market could enable the firm to increase prices when selling the product solely to the early market, given their lower price sensitivity; however, it would decrease the early market size. And decreasing the size of the early market could decrease their word-of-mouth influence on the main market to adopt the new product. Hence, the advertisement spending level in the main market increases, and accordingly, profit margins decrease. Further complications arise with the existence of repeat purchases, for example, service-based products, as most of the literature body on new product diffusion, especially the dual-market diffusion, assumes a single purchase transaction from both markets’ adopters. Under such settings, it is commonly accepted that customers who subscribe to the service every period will end up repeating the subscription or canceling, which is known as the churn rate. Churn rates would also be affected by the heterogeneity in the dual-market structure where early market churn rate would vary from the main market’s. Customer churn has attracted significant attention from researchers and managers in recent years after the rise of service-based firms, as they form about 80% of the US gross domestic product and demonstrate the relationship between a service firm’s customer churn rate and its long-term profits. We investigate the underlying trade-offs when planning a new product introduction with a dual-market structure and repeat purchases which, to the best of our knowledge, no previous work in either the marketing or the operations management literature has analyzed the profitability of a product under the combined effect of such conditions and underlying trade-offs. We contribute to the current literature by jointly optimizing the

time-to-main-market, pricing, and advertisement spending across the life cycle of newly introduced products under these conditions. We introduce an integer nonlinear programming model that optimizes these critical decisions simultaneously to maximize total profit across the product's life cycle. The model optimizes the decisions in two outcomes: (1) when the product is introduced solely to the early market and (2) when both markets coexist and are introduced to the product at the same time. The demand mapping is built by extending the Bass Diffusion framework to the dual-market structure and repeat purchases. We conduct extensive comparative computations with multiple periods and multi-level parametric combinations and reveal that delaying the time to enter the main market is a persistent optimal timing strategy that maximizes the profit function in various parametric settings. Additionally, the communication level between the two markets notably impacted different performance metrics when investigated independently and under the interplay effect with other model parameters.