Managing initial expectations when word-of-mouth matters Effects of product value and consumer heterogeneity

Authored by Sangyoon Yi, Jae-Hyeon Ahn

Date Published: 2017

DOI: 10.1108/ejm-10-2015-0752

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Flow charts

Model Code URLs: Model code not found

Abstract

Purpose - Consumer expectation not only influences purchase decision but also post-purchase satisfaction and word-of-mouth (WOM). This study aims to develop theories of initial expectation management by suggesting when it is desirable for new products to raise or lower consumer expectations. It systematically examines the interplay of product value and consumer heterogeneity in the dynamic process of new product diffusion under competition. Design/methodology/approach - Drawing on traditional diffusion and choice models, this study develops an agent-based model to formalize and analyze how consumers' initial expectations of a new product influence the interdependent processes of product sales, consumer satisfaction and WOM. The simulation analyses in controlled settings help understand the underlying mechanisms in a stepwise manner. Findings - The results show that, although the optimal strategy for low-value products is to induce consumer expectations higher than product value, high-value products are better introduced with expectations formed close to it. The results also highlight an important drawback of ``under-promising{''} strategies in reducing the base and volume of WOM. Further, the analysis illustrates how consumer heterogeneities in product valuation and initial expectation affect the effectiveness of expectation management. For high-value products, both heterogeneities reduce the effectiveness of the optimal strategy. For low-value products, however, value heterogeneity enhances the effectiveness, whereas expectation heterogeneity reduces it. Practical implications - Firms introducing new products should be sensitive to how consumers value the product and form expectations about it. Different from firms that must rely on aggressive advertising to sell inferior products by building up high expectations, those with superior products can rely more on the power of consumer WOM, which is much less costly and thus gives them a competitive advantage. Firms should also pay attention to how diversified the consumers are in product valuation and expectation. The expectation management strategy is more effective when consumers form more similar expectations. Inferior firms may leverage this mechanism to neutralize their disadvantages. Originality/value - The articulated mechanisms help push forward the research on new product diffusion and consumer expectation management. To the best of the authors' knowledge, this is one of the first studies to systematically analyze the impact of consumer heterogeneity on the effectiveness of expectation management.

Tags

Agent-based modeling Word-of-mouth new product diffusion Innovation Diffusion Model Service quality Sales Prospect-theory Loss aversion Consumer expectation Consumer heterogeneity Motion-pictures Reference price Social interactions Brand choice