Estimating Cannibalization Rates for Pioneering Innovations
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Estimating Cannibalization Rates for Pioneering Innovations
Estimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovationsts new demand is due to cannibalizing (he firm’s other products, rather than drawing from competition or generating primary demand. We introduce a time-varying Vector Error-Correction model to decompose the base sales of a new product into its constituent sources. The model allows managers to estima Estimating Cannibalization Rates for Pioneering Innovationste cannibalization effects, and calculate the new product’s net demand, which may be considerably less than its total demand. We apply our methodologyEstimating Cannibalization Rates for Pioneering Innovations
to the introduction of the Lexus RX300 using detailed car transaction data. This case is especially interesting since the Lexus RX300 was the first cEstimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovations a double cannibalization potential. We show how the contribution of the different demand sources varies over time, and discuss the managerial implications for both the focal brand and its competitors.Key words: New Product; Cannibalization; Aggregate Response Models; Time Series Models; Missing Dat Estimating Cannibalization Rates for Pioneering Innovationsa; Bayesian Methods. Dynamic Linear Models.11INTRODUCTIONInnovation, the process of bringing new products and services to market, is one of the most iEstimating Cannibalization Rates for Pioneering Innovations
mportant issues for firms and researchers alike (Hauser et al. 2006). To evaluate the success of a new product, managers need a method IO gauge not onEstimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovationsnssens 1994). When ignored, the success of the new product will be over-estimated (Reddy et al. 1994; Srinivasan et al. 2005). While managers practicing category management are typically aware of the cannibalization phenomenon (Basuroy et al. 2001; Zenor 1994), they typically are less clear on to ho Estimating Cannibalization Rates for Pioneering Innovationsw to quantify the size of the cannibalization risk.The problem is exacerbated when (i) manufacturers operate in multiple categories, and (ii) when intEstimating Cannibalization Rates for Pioneering Innovations
roducing radical, pioneering innovations. Manufacturers are often active in more than one category. Unilever’s portfolio, for example, includes many fEstimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovationsnd many car manufacturers sell cars in both the SUV and the Luxury Sedan category. Even when managers are aware that the new product may cannibalize their other products in the same category', they may overlook a similar cannibalization potential in Oỉher categories. This is especially an issue in c Estimating Cannibalization Rates for Pioneering Innovationsase of radical, pioneering innovations. These products add a new dimension to the consumers’ decision process (Cooper 2000), making it less obvious whEstimating Cannibalization Rates for Pioneering Innovations
ich categories will be affected (Moreau et al. 2001). For example, Apple’s iPhone crossed the boundaries of two categories (portable media players andEstimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovations the air-refresher category; as it eliminates odors, but also from the laundry-detergent category, as it works directly on fabric (Gielens and Steenkamp 2007). Given P&G’s presence in both categories, there are again two potential sources of2cannibalization. Also Purell combines features from multip Estimating Cannibalization Rates for Pioneering Innovationsle categories (Parasumaran, Grewal and Krishnan 2004, pp.95-96): liquid soap, skin care, and sanitizers. Interestingly. NiclsetVlRl placed it with theEstimating Cannibalization Rates for Pioneering Innovations
liquid soaps, while many retailers considered it part OÍ the skin-care category, rhe placement of the product in a certain category not only affects Estimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovations threat to the focal category only, rhe obvious danger is that cannibalization from other categories is overlooked.Therefore, it is crucial to measure wit/irn-category as well as hetween-i. ategory cannibalization effects. Both cannibalization sources arc unattractive to the film, as neither implies Estimating Cannibalization Rates for Pioneering Innovations that the net number of products sold increases (although profit may increase, depending on the respective margins). Within- and between-category branEstimating Cannibalization Rates for Pioneering Innovations
d switching, in contrast, come at the expense of other brands, and is therefore much more attractive from the introducing firm’s perspective. Finally,Estimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovationsue and Bronnenberg 2009).Even though the marketing literature has offered a plethora of methods and approaches to capture the total demand patterns OÍ new products (see e.g. Mahajan el al. 2000 lor an overview), little attention has been given to how to estimate the relative contributions of canniba Estimating Cannibalization Rates for Pioneering Innovationslization effec ts, both within the local category and across categories (Hauser el al. 2006).' Still, such an assessment of die extent of cannibalizatEstimating Cannibalization Rates for Pioneering Innovations
ion is crucial for under-standing whether or not the introduction c an be considered a success for the firm as a whole.1 Recently, die rise of die IntEstimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovations the revenues of traditional newspapers, while Biyalogorsky and Naik (2003) checked whether Tower Records' Internet sales division cannibalized its retail sales, tn bodi instances, little evidence of such channel cannibalization was found.3We develop a methodology to estimate the extent of cannibali Estimating Cannibalization Rates for Pioneering Innovationszation (within and between categories), brand switching (within and between categories), and primary demand that is generated when a pioneering producEstimating Cannibalization Rates for Pioneering Innovations
t is introduced. By looking at all these sources simultaneously, we can derive not only the absolute extent of cannibalization, but also its relative Estimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovations accommodate cannibalization and brand switching effects coming from multiple brands within and between categories, as it is unlikely that just one brand is affected. Second, the cannibalization and brand switching effects need to be time-varying. Demand changes are unlikely to fully materialize ins Estimating Cannibalization Rates for Pioneering Innovationstantaneously, nor are they likely to appear in a completely deterministic fashion. As such, we have to allow for a gradual evolution in the cannibalizEstimating Cannibalization Rates for Pioneering Innovations
ation rates, and for stochastic variations in those rates. Finally, the method should cope with missing data, as these characterize markets with frequEstimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovationsan techniques. It allows management to gauge the cannibalization and brand switching rales at an early stage of the innovation’s life cycle, offering the possibility to quickly detect any need for corrective actions. We apply our methodology to the introduction of the Lexus RX300, using six years of Estimating Cannibalization Rates for Pioneering Innovations weekly automobile transaction data. The case of the Lexus RX30Ơ is interesting, as it was the first crossover SUV, implying that it could draw customEstimating Cannibalization Rates for Pioneering Innovations
ers from two categories: the Luxury SUV and the Luxury Sedan category. Lexus had a significant presence in both, making the cannibalization potential Estimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovationsed model requirements, and on how our proposed4time-varying VEC model deals with them. After that, we present the model (Section 3), and discuss the empirical application (Section 4), results (Section 5), and conclusions (Section 6).2MODELING CHALLENGES & EXTANT LITERATUREOur modeling approach estim Estimating Cannibalization Rates for Pioneering Innovationsates five constituent sources of demand for the pioneering innovation: (i) cannibalization within the category, (ii) cannibalization between categorieEstimating Cannibalization Rates for Pioneering Innovations
s, (iii) brand switching within the category, (iv) brand switching between categories, and (v) primary' demand. In doing so. we identify three requireEstimating Cannibalization Rates for Pioneering InnovationsABSTRACTTo evaluate the success of a new product, managers need to determine how much of it Estimating Cannibalization Rates for Pioneering Innovationsfects, and•Being able to handle missing data.We elaborate on these features below, and discuss to what extent existing methods address them. Table 1 summarizes points of difference and parity between the different approaches.[Table 1 about here]2.1 Multivariate Cannibalization and Brand Switching Ef Estimating Cannibalization Rates for Pioneering InnovationsfectsThe pioneering innovation may induce cannibalization and brand switching effects coming from multiple brands within and across categories. To accEstimating Cannibalization Rates for Pioneering Innovations
ount for this, the model should have a multivariate specification, modeling cross effects and/or correlated error structures across all relevant brandGọi ngay
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