Advertising can harm tech firms’ profits
Wed 6 Jun 2018
Advertising innovative products can cause technology firms to make less money, according to a new UCL study.
The findings of a paper from academics at the UCL School of Management show that adoption of new products is often hindered by psychological anxiety.
Early adopters, who tend to be less anxious people, the study says, will likely purchase the product, particularly if it is on the market at a relatively low price.
But new and innovative products, particularly ones that disrupt existing models and habits, are much harder to sell to people who are more nervous about new technology.
There are different ways that companies can fight back against this trend, such as ‘familiarisation’ campaigns like free trials or marketing that focuses on soothing nervous buyers’ fears. The other, more potent way that late adopters can be persuaded to buy is through observing early adopters and becoming sufficiently happy that they will be comfortable with the product.
Importantly for companies looking to market their products in different ways to early and late adopters, the study argues that the combination of offering low prices to early adopters and offering reassuring advertising can be detrimental to their profits.
This is because if early adopters are offered a product at a lower price, the company can then charge a premium for later adopters once they have observed other people using it. If the company markets to both early adopters with low prices, and late adopters with reassuring marketing, they will not be able to charge a premium at a later point.
‘Lowering price in the early period increases the number of early adopters, which reduces the remaining consumers’ anxiety and raises their valuation of the product,’ the study says. ‘Thus, firms can benefit from the markup pricing by capturing the late adopters at a premium price.’
The study uses the example of Uber or Lyft to demonstrate the early/late adopter phenomenon, saying: ‘Despite the seemingly superior functional benefits that these new-generation products or services offer over existing alternatives, many consumers are still reluctant to adopt them due to various anxieties including: “Will it work with my other products?”, “Is it secure enough?”, and “Will I be able to use it easily?”‘
The report could represent a big change for tech companies, who currently spend enormous amounts on marketing. Amazon spent $5 billion (approx. £3.7 billion) on advertising in 2017.