How and who to sell to? How firms can maximize consumer profitability

A study by a UC Riverside marketing professor shows that the earliest consumers aren’t always the most profitable

Dr. Ashish SoodSchool of Business Administration

RIVERSIDE, Calif. (www.ucr.edu) – Is the consumer who rushes out to buy the latest product the most profitable for a company?

The answer is no, according to a new paper published by Ashish Sood, assistant professor of marketing at the University of California, Riverside and co-author V. Kumar, a marketing professor at Georgia State University.

“Consumers who rush to buy the products are not the most profitable because of differences in consumption levels and demand fluctuation in the adopter segments,” Sood said. “That is such a big insight that upends the traditional focus on early customers.”

Consumers are divided into five segments, in order of their adoption of new products after a new product launch: innovators, early adopters, early majority, late majority, and laggards. The surprise finding was that neither innovators nor early adopters were particularly profitable for the company, even though they may generate interest by lining up at stores in the wee hours for a product launch. In essence, Sood’s research found, those who buy early may not consume large numbers, nor do they remain loyal to the brand.

“We found that the early majority segment is the most profitable by far in all countries and product generations we studied,” Sood said. “Our model can help firms identify not only what is the most profitable segment, but how to increase their profitability.”

Sood described early majority consumers as “cautious, but still tech savvy.” They are likely to wait until the product is mature before purchasing, relying on feedback from friends and family, who may be considered innovators or early adopters. However, once they adopt the new product, these customers have higher consumption and demonstrate stronger loyalty toward the firm.

Another surprise: “(The age) of consumers has nothing to do with it. It’s more of an attitude toward new ideas,” Sood said.

Under the two-year research project, Sood and Kumar created a model that can help companies determine where and when to launch, allowing them to maximize profitability and tap into more profitable buyers. The research, published in the Journal of Marketing Research, analyzed data from a large global IT firm that offers a broad range of IT and cloud offerings, including software, hardware, and services serving business clients in multiple countries. The findings were part of a consulting project that Sood and Kumar undertook with the unnamed company.

Said Kumar, “We learned a lot through implementing this framework on a firm offering multi-generational high-technology products in multiple countries. We want to bring this learning into the academic literature.”

The authors created a new model that helps managers develop optimal targeting strategies for new product launches. This is especially important to companies for prospective client profiling and building strong client-firm relationships. Managers can make informed decisions on investments required to develop new markets, according to Sood.

“If a firm can reach early majority, it can have a higher return on investment,” he said. “This research has implications on new product development and product launching. It’s the timing – how and who you sell to.”

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