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10.13007/312

Ideas for Leaders #312

Is New Product Exclusivity Always a

Good Idea?

Key Concept

Having exclusive sales or distribution rights to a new product may sound like a

good deal. New research shows, however, that exclusivity can reduce profits,

especially if the firm does not have locked-in loyal customers, because it

eliminates the potential for greater word-of-mouth marketing.

Idea Summary

In 1995, Japanese telecommunications giant NTT agreed to distribute a new

product featuring new technology, but rejected the offer of exclusivity to the

Japanese market. Going against the conventional wisdom that the less

competition the better, NTT actually wanted more competition. The reason:

the product was unfamiliar and untested; as a result, the more customers

bought the product, even under a different brand, the more the product would

be accepted in the market — and thus the more of NTT’s brand of the product

would be sold. In short, cross-brand world-of-mouth would be more profitable

in the long run for NTT than exclusivity.

When AT&T was offered at least temporary exclusivity as the U.S. provider

for Apple’s early iPhone, its reaction followed the conventional wisdom: it

jumped at the chance to keep out competitors.

Which decision was the correct one? To explore this issue of product

exclusivity and cross-brand word-of-mouth (WOM), Renana Peres from

Hebrew University of Jerusalem and Christophe Van den Bulte from the

Wharton School conducted a simulation study manipulating a number of

different factors that would be relevant to the results, including:

Overlap in customer bases. In some markets, firms share a majority of the customers; in

other markets, a significant percentage of customers buy mostly or exclusively from a single

company or brand. Those customers are considered locked-in customers.

The structure of WOM. How much cross-brand WOM (e.g. for iPhones) and within-brand

WOM (e.g. for the Samsung Galaxy) exists in the market?

Length of exclusivity. In the simulation, exclusivity could last from 0 to 8 periods. Four

periods of exclusivity, for example, would mean that customers could only buy from the firm with

exclusivity for the first four periods the product was on the market, after which competitors

could sell the product.

The researchers expanded on the results of the simulation with a

mathematical analysis that explored issues such as price-sensitivity and sales

volume.

According to the results, both NTT and AT&T made the right decision

Authors

Peres, Renana

Van den Bulte, Christophe

Institutions

Hebrew University of Jerusalem

The Wharton School of the University of

Pennsylvania

Source

Journal of Marketing

Idea conceived

January 2014

Idea posted

January 2014

DOI number

Subject

Marketing

Sales Management and Strategy

because of the differences in the level of customer loyalty or customer lock-in.

The research shows that whether or not temporary exclusivity is profitable

depends to a large extent on the firm’s level of locked-in customers. Because

NTT had a high-level of locked-in customers, the word-of-mouth from the sale

of competitor products benefited NTT. Once its customers heard about the

new product, they turned to their telecommunications company of choice —

NTT — to buy the product. AT&T had a much lower level of loyal customers,

and as a result, WOM would have probably benefitted their competitors.

There would be no trade-off in profitability through the ‘social contagion’ of

word-of-mouth.

Even in markets with strong within-brand word-of-mouth (i.e. everyone’s

talking about a specific brand, not the product category), it is sometimes

better to forego temporary exclusivity. This is especially true for price-

sensitive customers. For example, when a second firm finally enters a market

for a product that had previously been sold exclusively by another firm, the

second firm has to dramatically lower prices to make inroads into the market

— a step that inevitably lowers prices for the entire market.

Exclusivity, in sum, is not an automatic benefit. The structure of the market,

the type of product (e.g. does it involve a new technology unfamiliar to

customers?), and the price-sensitivity of customers are some of the major

factors that must considered before any decision is made to accept, or forego,

exclusivity.

Business Application

The research offers clear, applicable lessons for decision-makers in a

number of different situations.

If you’re launching a new product, consider letting competitors enter

the market. The research shows that, counterintuitively, you can increase

your profits by letting competitors in on the action. Any resulting loss of market

share will be compensated by the increased or accelerated demand for the

product, depending on your level of customer lock-in.

If you’re a distributor, don’t automatically seek temporary product

exclusivity. Instead, as with product manufacturers, consider the potential

impact of cross-brand word-of-mouth on the product’s success. It should also

be noted that different types of products are going to benefit differently from

word-of-mouth. For example, a radically new product or technology needs

word-of-mouth to overcome the hesitation of customers to take a risk on the

product. Word-of-mouth is less important for low-risk products in mature

industries, and therefore exclusivity is desirable.

Don’t let benchmarking fool you. The concept behind cross-brand word-of-

mouth is that the rising tide lifts all boats. Measuring your financial

performance against competitors might hide the profits lost because

exclusivity tamped down word-of-mouth marketing.

Further Reading

When to Take or Forego New Product Exclusivity: Balancing Protection

from Competition against Word-of-Mouth Spillover. Renana Peres &

Christophe Van den Bulte. Journal of Marketing (forthcoming).

Further Relevant Resources

Renana Peres’s profile at the Hebrew University of Jerusalem

Christophe Van den Bulte’s profile at The Wharton School of the University of Pennsylvania

The Wharton School's Executive Education profile at IEDP

© Copyright IEDP Ideas for Leaders 2014

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