Optimal Promotion Mix and Product Announcement Strategy with Consumer Valuation Uncertainty


Student thesis: Doctoral Thesis

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Award date24 Sept 2020


Due to the lack of related information, consumers may be uncertain about the value of an existing product (e.g., an innovative product) or a future new product. This uncertainty may make firms miss target consumers, unable to charge a satisfactory price, and further hurt profits. To decrease the uncertainty and affect consumer purchase behavior, many firms adopt referral reward programs (RRPs) to motivate prior adopters to disclose experience-type information about existing products; and adopt a preannouncement to disclose relevant information in advance of the product launch, making a commitment on, for example, the characteristics, availability, and performance of the product to be released in the future.

However, the implementation of these marketing activities raises new issues. When adopting RRPs whose market reach depends on the number of prior adopters, some firms, such as Tesla, additionally adopt advertising which has no consumer-driven limitation on the market reach, for the purpose of leveraging the respective advantages of these two campaigns. But when consumers are uncertain about the value of the promoted product, this promotion mix will endogenize consumer valuation uncertainty, which will hurt promotional performance. When adopting preannouncements, different preannouncement content performs differently on decreasing consumer uncertainty. Furthermore, should consumers be uncertain as to whether the commitment will be delivered in the future, they will anticipate future potential regret when making decisions, which may in turn affect the profitability of preannouncements.

This dissertation provides firms with guidance on how to incorporate the above issues into their promotion mix and product announcement strategy. It contributes to previous studies by capturing these considerations and presenting some results that are counter-intuitive or different from prior results.

In relation to the promotion mix strategy, it is indicated that the mix of advertising and an RRP should not always be adopted. One reason is that consumer referrals can cause advertising waste. Although previous studies have found that advertising can enhance the effectiveness and the number of consumer interactions, the negative effect of consumer interactions on advertising performance also deserves attention. Furthermore, under certain conditions, an increase in the number of consumer referrals will decrease profits, even if referrals cost nothing. Another reason is that with the promotion mix, to reduce advertising waste, a firm must attract those consumers who are only hyped by advertising and thus hold a high uncertainty level concerning the product. To compensate for their high uncertainty level, the firm must set a low price; however, this pricing strategy will leave the firm unable to extract much surplus from those consumers who are reached by consumer referrals and thus possess a low uncertainty level. This result reminds the firm to be cautious about the interaction between different promotional campaigns and between promotional strategy and pricing strategy.

For product announcement strategy, it is demonstrated that if a firm sells an existing product and plans to release a new-generation product in the future that contains attributes of the existing product and new attributes, then it should always preannounce its new product, but preannounce different content under different conditions. Specifically, a firm that discounts its future profit slightly should adopt a preannouncement with a price commitment for the future new product when the attribute of the existing product will depreciate highly in the future and the new attribute's quality is low; otherwise, it should adopt a preannouncement without a price commitment. However, a firm that discounts its future profit highly should always adopt the latter type of preannouncement. Furthermore, anticipated regret may increase or decrease the optimal profit. Therefore, when preannouncing the new-generation product, the firm should occasionally prime anticipated regret, such as by highlighting uncertainty and reminding consumers of their future potential regret if they wait.

    Research areas

  • consumer valuation uncertainty, advertising, referral reward program, promotion mix, new product preannouncement, anticipated regret