Demand and Consumers →
- 27 Jul 2011
- Research & Ideas
Customer Loyalty Programs That Work
Thanks to ever-improving technology, customer loyalty programs are proving extremely popular among retailers—but merchants are not getting all they should out of them. The reason? Professor José Alvarez says retailers need to see customers as partners, not transactions. Key concepts include: Most retailers are at a very basic level in using loyalty programs, and many customers see the programs as punitive. Successful retailers connect with customers via loyalty programs at three levels starting with an introduction, followed by a retailer-initiated communication, and finally with customer- or retailer-initiated feedback loops. Retailers should ask themselves, How do I create a partnership with the consumer? Data collected from these programs can help merchants make smarter decisions on everything from where to open a new store to pulling the plug on a fading brand. Closed for comment; 0 Comments.
- 16 Jun 2011
- Working Paper Summaries
Search Diversion, Rent Extraction and Competition
Retailers, search engines, shopping malls and other intermediaries often deliberately design their physical layouts or e-commerce sites in order to divert customers' attention away from the products they were initially looking for, with hopes that they'll buy a bunch of other products, too. This paper explores various incentives for so-called "search diversion" in a couple of scenarios—when stores internalize their affiliation decisions with intermediaries, and when competition is introduced among intermediaries. Research was conducted by Andrei Hagiu of Harvard Business School and Bruno Jullien of the Toulouse School of Economics. Key concepts include: If an intermediary cannot price-discriminate among several stores, it can use search diversion to reduce the variance of store profits—thus improving its rent extraction power. When stores affiliate with multiple intermediaries but consumers affiliate with only one, the incentives to divert search are reduced. But when consumers affiliate with multiple intermediaries and stores affiliate with only one, intermediary competition may exacerbate search diversion incentives. The broad implication of this paper is that competition may lead to intermediation design decisions that go against customer preferences in favor of decisions that favor third-party sellers or advertisers. Closed for comment; 0 Comments.
- 19 May 2011
- Research & Ideas
Empathy: The Brand Equity of Retail
Retailers can offer great product selection and value, but those who lack empathy for their customers are at risk of losing them, says professor Ananth Raman. Closed for comment; 0 Comments.
- 16 May 2011
- Research & Ideas
What Loyalty? High-End Customers are First to Flee
Companies offering top-drawer customer service might have a nasty surprise awaiting them when a new competitor comes to town. Their best customers might be the first to defect. Research by Harvard Business School's Ryan W. Buell, Dennis Campbell, and Frances X. Frei. Key concepts include: Companies that offer high levels of customer service can't expect too much loyalty if a new competitor offers even better service. High-end businesses must avoid complacency and continue to proactively increase relative service levels when they're faced with even the potential threat of increased service competition. Even though high-end customers can be fickle, a company that sustains a superior service position in its local market can attract and retain customers who are more valuable over time. Firms rated lower in service quality are more or less immune from the high-end challenger. Closed for comment; 0 Comments.
- 28 Apr 2011
- Working Paper Summaries
When Smaller Menus are Better: Variability in Menu-Setting Ability and 401(k) Plans
Economists love menus, which can be used to help understand people's choices. For example, do we prefer more choices (larger menu) or fewer (shorter menu)? But the menu itself has to be pre-selected. Research by David Goldreich (Rotman School of Management, University of Toronto) and Hanna Halaburda (Harvard Business School) focuses on the menu setter's decisions about what to include, and how large a menu to construct in the context of 401(k) plan choices. Key concepts include: When the cost of increasing the size of a menu is sufficiently small, a low-ability, or less skilled, menu setter will offer more items in the menu than a high-ability menu setter, who will be more discriminate in deciding which menu items to include. Combining the two results leads to a negative relation between menu size and menu quality: Larger menus are worse. This counterintuitive finding follows from the fact that the smaller menu set by the high-ability menu setter is not a subset of the larger menu set by the low-ability menu setter. One must be aware of the role played by menu setters in designing the menu offered to individuals. An unskilled menu setter may offer many choices, but the quality of those choices may be inferior. Closed for comment; 0 Comments.
- 13 Apr 2011
- Working Paper Summaries
The ‘IKEA Effect’: When Labor Leads to Love
Companies increasingly involve customers in the design and assembly of products, from Converse allowing customers to design their own shoes to IKEA asking customers to assemble their own furniture. In this paper researchers Michael I. Norton (Harvard Business School), Daniel Mochon (University of California at San Diego), and Dan Ariely (Duke) use the "IKEA Effect" to explain the increase in valuation we place on products we build ourselves. The researchers discuss the implications of the IKEA Effect for marketing managers and organizations more generally. Key concepts include: Successful assembly of products—no matter how amateurish—leads consumers to value them over and above the value that arises from merely purchasing a product. Labor increases valuation of completed products not just for consumers who profess an interest in "do-it-yourself" projects, but even for those who express a preference for buying preassembled products. Successful completion is an essential component for the link between labor and liking to emerge; participants who were not permitted to finish their creations did not show an increase in willingness-to-pay. The marketing challenge lies in convincing consumers to engage in the kinds of labor that will lead them to value products more highly, especially given their general aversion to such pursuits. The overvaluation that occurs as a result of the IKEA Effect has implications for organizations as a contributor to two key organizational pitfalls: sunk cost effects and the "not invented here" syndrome. Closed for comment; 0 Comments.
- 06 Apr 2011
- Working Paper Summaries
Do Not Trash the Incentive! Monetary Incentives and Waste Sorting
Many cities encourage residents to sort their domestic trash into separate bins, for the sake of recycling some of it and thus reducing the amount of garbage that ends up in landfills. The problem is that sorting waste is not a fun activity, and not everyone is willing to do it. Using data from 95 municipalities in Italy, this paper discusses whether and how monetary incentives can encourage people to sort their trash. Research was conducted by Alessandro Bucciol of the University of Verona and the University of Amsterdam, Natalia Montinari of the University of Padua and the Max Planck Institute of Economics, and Marco Piovesan of Harvard Business School. Key concepts include: The paper discusses the pay-as-you-throw (PAYT) system, in which residents pay lower fees if they sort their trash than if they don't. The researchers found that the introduction of a PAYT system had a significant and positive net effect of 12.2 percent on the amount of trash that residents sort. This compares with a positive effect of 18.1 percent for the nonmonetary incentive of letting residents leave sorted bins outside their doors, rather than requiring them to carry their trash to drop-off bins on the street. Thus, the PAYT system is more of a complement than a substitute for the door-to-door collection system. However, the PAYT system does not affect the actual amount of waste each household creates. While the system induces residents to sort their trash, it does not induce them to produce less of it. Closed for comment; 0 Comments.
- 25 Mar 2011
- Working Paper Summaries
How Do Incumbents Fare in the Face of Increased Service Competition?
Companies that compete by offering a high level of service are particularly vulnerable to lose customers—even longtime customers—when competitive entrants offer increased service levels, according to new research in the retail banking industry by Ryan W. Buell, Dennis Campbell, and Frances X. Frei, all of Harvard Business School. The good news for providers of high-touch service is that if they can sustain the service advantage over time, they could be rewarded with higher value customers. Key concepts include: Incumbents offering high quality service attract and retain customers who are disproportionately service sensitive and systematically vulnerable to competitors offering superior service. It is the high quality incumbent's most valuable customers—those with the longest tenure, most products, and highest balances—who are the most vulnerable to superior service alternatives. Conversely, when the incumbent fails to maintain a high service position within the market, its customers are vulnerable to competitors offering inferior service but lower prices. Firms that make the strategic decision not to compete on service may not need to be concerned about the entry or expansion of competitors offering superior service. A long-run implication is that incumbents that can sustain a high level of service relative to local competitors will be able to attract and retain higher value customers over time. Closed for comment; 0 Comments.
- 21 Mar 2011
- Research & Ideas
Are We Thinking Too Little, or Too Much?
In the course of making a decision, managers often err in one of two directions—either overanalyzing a situation or forgoing all the relevant information and simply going with their gut. HBS marketing professor Michael I. Norton discusses the potential pitfalls of thinking too much or thinking too little. Closed for comment; 0 Comments.
- 18 Feb 2011
- Working Paper Summaries
A Behavioral Model of Demandable Deposits and Its Implications for Financial Regulation
Depositors are overconfident of their chances of recovering demandable deposits in a bank run. In a recent research paper, professor Julio J. Rotemberg reviews various government regulations available to be imposed on financial institutions—minimum capital levels, asset requirements, deposit insurance, and compulsory clawbacks—to understand how much they can help protect investors. Key concepts include: US households hold 11.4 percent of their financial assets in "transactions accounts" that are immediately available—about $3.5 trillion. Due to cognitive bias, people are overconfident about their position in line to withdraw their deposits in a bank run. Depositors who intend to spend far into the future hold demandable assets because they give investors the opportunity to change their portfolio at will on terms that are determined in advance. The paper offers a justification for various policies that governments use to regulate financial institutions, helping depositors who are too optimistic about how they will fare in a run. Closed for comment; 0 Comments.
- 14 Feb 2011
- Research & Ideas
Clay Christensen’s Milkshake Marketing
Many new products fail because their creators use an ineffective market segmentation mechanism, according to HBS professor Clayton Christensen. It's time for companies to look at products the way customers do: as a way to get a job done. Closed for comment; 0 Comments.
- 10 Jan 2011
- Research & Ideas
Is Groupon Good for Retailers?
For retailers offering deals through the wildly popular online start-up Groupon, does the one-day publicity compensate for the deep hit to profit margins? A new working paper, "To Groupon or Not to Groupon," sets out to help small businesses decide. Harvard Business School professor Benjamin G. Edelman discusses the paper's findings. Key concepts include: Discount vouchers provide price discrimination, letting merchants attract consumers who would not ordinarily patronize their business without a major price incentive. These vouchers also benefit merchants through advertising, simply by informing consumers of a merchant's existence via e-mail. For some merchants, the benefits of offering discount vouchers are sharply reduced if individual customers buy multiple vouchers. As a marketing tool, discount vouchers are likely to be most effective for businesses that are relatively unknown and have low marginal costs. Closed for comment; 0 Comments.
- 29 Nov 2010
- HBS Case
United Breaks Guitars
A new case coauthored by HBS marketing professor John Deighton and research associate Leora Kornfeld offers an object lesson in the dangers social media can bring for big, recognizable companies and their brands. From the HBS Alumni Bulletin. Open for comment; 0 Comments.
- 16 Aug 2010
- Lessons from the Classroom
HBS Introduces Marketing Analysis Tools for Managers
These tools can help managers make informed decisions on market analysis, breakeven analysis, customer lifetime value, profit and pricing, and analyzing the competitive environment. Interview with Tom Steenburgh. Key concepts include: Immense changes in marketing are driving an increasing need for data analysis. The five HBS-developed tools provide decision-making support for market analysis, breakeven analysis, customer lifetime value, profit and pricing, and analyzing the competitive environment. Open for comment; 0 Comments.
- 11 Aug 2010
- Working Paper Summaries
The Influence of Prior Industry Affiliation on Framing in Nascent Industries: The Evolution of Digital Cameras
Firms entering a new product market face tremendous ambiguity and competitive uncertainty, particularly when the new market is sparked by radical technological change. Potential customers have little or no experience with products, and during this period of turbulence, firms experiment with alternative product configurations, functions, and technologies. By studying the emergence of the consumer mass market for digital cameras, Carlson School of Management professor Mary J. Benner and HBS professor Mary Tripsas explore what factors influence a firm's initial introduction of product features during the nascent stage of a product market, and how the process of convergence on a standard set of features unfolds. In particular, they assess how a firm's prior industry affiliation influences its conceptualization of the product. Key concepts include: The authors used a dataset that includes the entry date and features of almost every camera in the history of the U.S. consumer digital camera industry from its inception in 1991 through 2006. Results suggest that firms from the same prior industry shared similar beliefs about what features (such as optical zoom) would be valued, as reflected in their concurrent introduction of features. Firms were likely to imitate the behavior of firms from the same prior industry, as opposed to that of firms from different prior industries, in introducing some but not all features. Finally, as a firm's experience with a particular feature increased, the influence of prior industry decreased. Closed for comment; 0 Comments.
- 05 Aug 2010
- What Do You Think?
What Is Customer Opinion Good For?
Summing Up: Are customer wishes irrelevant when creating a new product? Jim Heskett's readers say it depends on the product, on market goals, and where you are in the development cycle. (Online forum has closed; next forum opens September 2.) Closed for comment; 0 Comments.
- 07 Jun 2010
- Research & Ideas
Improving Brand Recognition in TV Ads
Advertisers pay millions of dollars to air TV ads that are subsequently ignored by a third of viewers. New research by HBS professor Thales S. Teixeira offers a simple, inexpensive solution for marketers to retain brand recognition. Key concepts include: Repeating or "pulsing" brief images of a brand can significantly reduce the likelihood that viewers will zap it. Altering commercials to mimic a pulsing strategy is a virtually cost-free fix for a significant payoff. Viewers' attention should be managed as any other scarce resource. Closed for comment; 0 Comments.
- 03 Jun 2010
- Working Paper Summaries
Platforms and Limits to Network Effects
Why do platforms that restrict choice and charge higher prices seem to prosper alongside platforms offering cheap or free unlimited choice? In the online dating market, for example, eHarmony deliberately limits the number of candidates available to its customers. Headhunters show only a few candidates to the companies, and even fewer companies to the candidates. In the housing market, brokers limit the number of houses they show to potential buyers and sellers. In this paper, HBS professors Hanna Halaburda and Mikolaj Jan Piskorski challenge conventional understanding of platform competition and network effects by describing a two-sided matching environment and studying the indirect network effects in this environment. They show that the interplay between more choice and more competition influences the strength of network effects and attractiveness of a platform. Some agents may opt for a platform with few choices to avoid higher levels of competition. The researchers' model helps explain why platforms that limit their choice set coexist (and thrive) alongside platforms that offer greater choice. Key concepts include: Excessive increases in the number of candidates decrease agents' expected payoffs, due to increased competition. Some agents rationally opt for platforms that constrain choice even if they do not receive any additional service from such platforms, to avoid higher levels of competition. The strength of network effects depends on the type of the agent and on the number of available candidates on both sides of the market. A platform could use these factors to its advantage by offering fewer candidates to its members on both sides of the market. Agents may be willing to pay for participation in such a platform (and hence rationally decide to limit their choices) because they would face less competition. Closed for comment; 0 Comments.
- 30 Nov 2009
- Research & Ideas
Tracks of My Tears: Reconstructing Digital Music
Record labels have depended on album sales to boost profits. But in the digital music era, consumers prefer single songs over music "bundles." The result? Harvard Business School professor Anita Elberse says it is time for the industry to rethink its products and prices. Key concepts include: The unbundling of albums into a series of separately sold songs on digital music stores is hurting record label profits. Labels are less likely to get away with selling a bundle based on the strength of one or two tracks if the other songs are far less appealing. A strong artist reputation helps to curb the negative impact of unbundling. Labels might consider pushing for higher prices online and generally more flexibility in setting prices. Giving preference to quality over quantity and designing smaller, more consistent bundles may be beneficial. Closed for comment; 0 Comments.
Salience in Quality Disclosure: Evidence from the U.S. News College Rankings
Why are the U.S. News and World Report College Rankings so influential? According to this paper by Michael Luca and Jonathan Smith, it's at least in part because U.S. News makes the information so simple. While earlier college guides had already provided useful information about schools, U.S. News did the work of aggregating the information into an easy-to-use ranking, making it more salient for prospective students. The authors show that these rankings matter in a big way: a one-rank improvement leads to a 0.9 percent increase in applicants. However, students tend to ignore the underlying details even though these details carry more information than the overall rank. Key concepts include: College applicants pay attention to a school's overall rank, rather than the more informative (but more complicated) underlying information. When U.S. News and World Report chooses how much weight to apply to different categories (such as faculty/student ratio and alumni giving rate), they are exerting a large amount of influence over students' application decisions. U.S. News presents many of these details, but it's the bottom line (i.e., the weights chosen by U.S. News) that matters. When deciding how to present information, managers should keep in mind that simple metrics are most effective. Providing detailed information to consumers may seem useful, but aggregate statistics (such as a ranking or grade) tend to have a larger impact on decision making. Closed for comment; 0 Comments.