Launch Strategy for Network Effect Products
With the increased prevalence of products whose success is influenced by the network effect, there has been growing interest in the link between launch strategy decisions and new product performance. Network effect is defined as a phenomenon in which the value of a product to its users increases as more people use the same good. The vast majority of the previous research on the topic has focused on investigating successful launch strategies for innovative, high-tech products. Network effects have changed the competitive landscape. What the existing literature fails to address are decision-making guidelines to managers on how to successfully introduce such a product. As high as 50 percent of new products fail at launch. The type of launch strategy employed is one of the key determinants of new product success. Instead of deploying strategies like skimming pricing (setting a higher price for a product than is typically its value at launch) or niche targeting (trying to sell to a certain specific subset of the population), a product that is subject to the network effect should be introduced to the market as widely as possible with the main objective of achieving high market penetration quickly. Giving away your product for free during a trial period is an example of such a strategy. The positive feedback effect of the network effect generates a self-reinforcing prophecy where the strong competitors get stronger and any secondary players in the market grow weaker.
The journal article details how in its most extreme form, the network effect can result in a winner-take-all market where a single firm or technology vanquishes all others. This relates to what we have been talking about in class. We learned that considering the graph with value on the y-axis and z on the x-axis, 0 and z’’ are stable whereas z’ is unstable. z’ can be seen as the tipping point. If z < z’, the value actually converges to z’. If z > z’, the value converges to z’’. This relates to what was discussed in the article in terms of a winner-take-all market. There is one point in which either demand will plummet to nearly 0 (meaning market share will not be shared), or demand will increase substantially to some value z’’ (such a high value that it is practically a winner-take-all market). The article argues that marketing strategies that can be applied to the maximization of extrinsic product value, such as penetration pricing, bundling, mass targeting and preannouncement strategy as opposed to skimming pricing, unbundling, niche targeting and no preannouncement are favorable. This also connects to this same idea we have seen in class. It is worth lowering the price (perhaps even losing money on a product) in the beginning in order to achieve the extrinsic value which should hopefully push the product towards the z’’ stable equilibrium. Once this is reached, pricing can be changed in order for the company to actually start making money on the product. Before this point; however, a short-term loss should be expected. If this is not incurred, the demand may instead move to the stable point of 0 (where the product is guaranteed to fail in the long-term).
Source:
https://link.springer.com/article/10.1177/0092070303031003003
https://link.springer.com/content/pdf/10.1177/0092070303031003003.pdf