This article is republished with permission from BusinessThink at UNSW Business School. You can access the original article here.
Pent-up consumer demand can drive profits, but there are risks
In the world of technology, advances occur at breakneck speed and history tells us that if companies don’t lead the pack, they pay a high price – oblivion.
We know that digital photography killed Kodak, scanners killed the fax machine and video stores are going the way of old-school pay phones.
In the smartphone world, which has been savage, Apple crushed Nokia and there have been epic fails, such as from BlackBerry, Amazon’s Fire Phone, the Facebook phone and the Samsung Galaxy Note 7, which came complete with exploding batteries.
Globally, mobile phones are big business, with the industry worth an estimated $US431 billion. There are about 2.5 billion smartphone users, set to increase to 6.1 billion by 2020, according to Ericsson.
So competition will be fierce this month with Apple and Samsung releasing their next generation phones. And Google’s new offering is expected next month. In this combative environment, companies need to get their products right or lose market share.
Delaying and delaying
A big part of industry strategy has been to satisfy consumers who play the product upgrade waiting game with releases based on technology advancements, but new research from UNSW Business School warns this approach is not as good as assessing brand and marketing factors for upgrade timing.
However, big players such as Apple and Samsung “can’t get too complacent about their massive brand loyalty”, warns Sam Kirshner, a lecturer in the school of information systems and technology management at UNSW Business School.
“Relying on that could cause a lot of damage. Brand commitment creates pent-up demand, which is where they get all the advantages – and the longer companies delay product upgrades, the larger that pent-up demand and the advantages are likely to be,” says Kirshner.
“But at the same time, this loyalty is a double-edged sword. The longer companies wait to upgrade products, the more customers they lose if they have a big failure. This can potentially damage brand commitment, because their clients will not have the same level of trust in the brand.”
Kirshner points to the spectacular fall of Blackberry, which dropped from market leadership in 2007 to nowhere, after it launched a phone without a functional web browser.
“Blackberry kept delaying and delaying product releases because it was so profitable for them,” Kirshner says.
Two years after the first iPhone hit the market in 2007, Blackberry had 50% of the market, but failing to deliver to consumer preferences proved fatal and coincided with the launch of the hugely successful iPhone 4 in 2010. And the rest is history.
The Apple ecosystem
So, when is the best time to upgrade a technology product such as smartphones?
It depends on the company and its brand loyalty, but there are other factors to get right – the technology offering, the level of pent-up consumer demand and whether it’s time to discount the older product being replaced.
In his research, conducted with academics at Queens University in Ontario, Kirshner argues that companies with high brand commitment have an advantage, because they can delay costly upgrades and make customers wait long periods for new products, as Apple does.
For the release of its iPhone 5s in 2013, customers waited 13 months, and Apple then sold close to nine million phones globally in one weekend, which made up for lost sales. Later, the iPhone 6 became one of its best sellers ever.
But can the Apple phenomenon continue with its present strategy?
“I think the iPhone 6 was pretty innovative compared to phones before that, but since then there have been only small incremental improvements,” says Kirshner.
“Even though Apple is really delaying their cycles, it does not seem that their upgrades are corresponding to improvements in technology.”
Market response to the latest iPhone X, with new technology features billed as "the biggest leap forward since the original iPhone" by Apple CEO Tim Cook, will be an indicator of Apple’s strategy, as many of its customers are ready to purchase a new phone after a 12-month wait since the last upgrade.
Factors such as Google’s entry into the smartphone space last year with its Pixel phone could be a wild card against Apple.
“I think a lot of people are getting complacent with the Apple ecosystem. If Google starts to leverage their resources in trying to get strongly into this market with its next phone, it could be disruptive,” Kirshner says.
Benefits and risks
With his co-authors, Kirshner has explored the benefits of delaying product upgrades in a new way, which shows how important marketing and branding is in terms of the upgrade cycle and higher profits.
“What is new about our research is that our model looks at product upgrades in the context of branding, sales and discounting all together, which has not been done before,” Kirshner says. “Traditional research models have just looked at technology advancements.”
If companies can use high brand commitment to delay upgrades, they can also benefit from better negotiations with suppliers because shipments and sales can be guaranteed and planned ahead.
So both the benefits and risks of pent-up consumer demand must be assessed to analyse the impact of brand commitment on upgrade timing, Kirshner warns.
It is better for companies to adopt this strategy, rather than rely on a policy of upgrading purely to correct a lag in technology.
According to Kirshner, shorter product release cycles are better for companies launching products that are new on the market or uncertain, or for companies with low brand loyalty.
“For companies that really don’t have any brand commitment, they really have no choice but to upgrade all the time because their market is not consumers who are dedicated to them. Their customers are mainly just people who have a need right then and there, like if their phone breaks,” he says.
Different technology sectors
What happens if a new product fails? When the Samsung Galaxy Note 7 was recalled after the phone’s batteries were found to catch fire, the resulting bad publicity went viral worldwide.
While the Note explosion problem affected Samsung’s overall smartphones sales in 2016, the results may not be enduring, because the Note is a relatively niche product that does not have the same pent-up demand as Samsung’s Galaxy premium phones, says Kirshner. But time will tell.
The real test will be in sales for the latest Samsung Galaxy Note 8.
Worldwide, Samsung is still the leader, commanding about 23% market share and Apple 12%, according to the International Data Corporation.
Shipments of new phones are forecast to total 1.5 billion this year, up from 712 million units in 2012, according to HIS Inc. Higher sales are partly fuelled by strong growth in emerging markets such as China. In 2016, Apple alone sold more than 210 million phones worldwide.
While Kirshner’s research focuses on smartphones, its warnings about product upgrade timing can apply to different technology sectors such as games, music technology and computer hardware and software.
“Technology does grow your market but if you don’t watch out, advancements from competitors will also shrink your market,” he warns. “So it’s very dynamic and applies to a lot of consumer products.”
With technology always evolving, the risks and rewards of upgrading have to be carefully balanced based on dynamics that are unique to each company and its position in the market.