Profits are negative or low in the introduction stage. Promotional expenditures are at their highest ratio to sales because of the need to
1. Inform potential consumers,
2. Induce product trial
3. Secure distribution in retail outlets.
Firms focus on those buyers who are the most ready to buy, usually higher-income groups. Prices tend to be high because costs are high. Because it takes time to roll out a new product, work out the technical problem, fill dealer pipelines, and gain consumer acceptance, sales growth tends to be slow at this stage.
Sales of expensive new products such as high-definition TV are slowed by additional factors such as product complexity and fewer potential buyers.
Companies that plan to introduce a new product must decide when to enter the market. To be first can be rewarding, but risky and expensive. To come in later makes sense if the firm can bring superior technology, quality, or brand strength.
Speeding up innovation time is essential in an age of shortening product life cycle. Being early can pay off. One study found that products that came out six months late but on budget earned an average of 33% less profit in their first 5years; product that came out on time but 50% over budget cut their profits by only 4%.
Most studies indicate that the market pioneer gains the most advantage. Companies like Campbell, Coca-Cola, Hallmark, and Amazon.com developed sustained market dominance. Carpenter and Nakamoto found that 19 out of 25 companies who are market leaders in 1923 were still the market leaders in 1983, 60 years later. Robinson and Min found that in a sample of industrial-goods businesses, 66% of pioneers survived at least 10 years, versus 48% of the early followers.
The sources of the pioneerâ€™s advantage are:
Early users recall the pioneerâ€™s brand name if the product satisfies them. The pioneerâ€™s brand also establishes the attributes the product class should posses. The pioneerâ€™s brand normally aims at the middle of the market and so captures more users. Customer inertia also plays a role; and there are producer advantages: economies of scale, technological leadership, patents, ownership of scarce assets, and other barriers to entry. Pioneers can have more effective marketing spending and enjoy higher rates of consumer repeat purchases. An alert pioneer can maintain its leadership indefinitely by pursuing various strategies.
The pioneer advantage, however, is not inevitable. Look at the fate of Bowmar (hand calculators), Appleâ€™s Newton (personal digital assistant), Netscape (Web browser), Reynolds (ballpoint pens), and Osborne (portable computers), market pioneers who were overtaken by later entrants.
28 industries were studied by an expert where the imitators surpassed the innovators. He found several weakness among the falling pioneers, including new product that were too crude, were improperly positioned, or appeared before there was strong demand; product-development costs that exhausted the innovatorâ€™s resources; a lack of resources to compete against entering larger firms; and managerial incompetence or unhealthy complacency.
Successful imitators thrived by offering lower prices, improving the product more continuously, or using brute market power to overtake the pioneer. None of the companies that now dominate in the manufacture of personal computersâ€”including Dell, GATEWAY, AND Compaqâ€”were first movers.
There are doubts about the pioneer advantage. They distinguish between an inventor (first to develop patents on a new-product category), a product pioneer (first to develop a working model), and a market pioneer (first to sell in the new-product category). They also include non surviving pioneers in their sample. They conclude that although pioneers may still have a advantage, a large number of market pioneers fail than has been reported and a larger number of early market leaders (though not pioneers) succeed.
Examples of later entrants overtaking market pioneers are IBM over Sperry in mainframe computers, Matsushita over Sony in VCRs, and GE over EMI in CAT scan equipment.
The pioneer should visualize the various product markets it could initially, knowing that it cannot enter all of them at once. Suppose market-segmentation analysis revealed, the pioneer should analyze the profit potential of each product market singly and in combination and decide on a market expansion. In a more recent study, the following five factors are identified as underpinning long term market leadership, vision of a mass market, persistence, relentless innovation, financial commitment and asset leverage.