The Idea:Understanding and accounting for consumer replacement cycles can help companies improve their product-introduction and -design strategies.
How often do consumers replace their computers? And what drives them to do so? Knowing the answers to these questions is crucial for firms selling high-tech consumer goods. Consumers who wait until this year to purchase their first PC, for example, are clearly different customers than those buying their third or fourth computer. These buyers, however, are treated the same way in most marketing plans because existing consumer-purchase models focus only on first-time adopters, says Professor Brett Gordon. This approach ignores the importance of price, quality, product obsolescence and other characteristics of the consumers’ existing products that drive them to replace their goods.
Gordon developed a new, dynamic consumer-demand model that takes into account replacement decisions and demonstrates how companies can more effectively market to customers making replacement purchases. For example, if a price war spurred a group of consumers to purchase computers a few years ago, that segment of buyers are more likely to replace their PCs with a new value-oriented product than with one that offers a technological breakthrough.
Because historical sales data alone do not inherently measure replacement decisions, Gordon constructed a unique data set from the PC-processor industry that offers a snapshot of the share of consumers who own certain types of processors over time. He examined price, quality, sales and ownership of PC processors manufactured by Intel and AMD from January 1993 to June 2004 and found substantial variation in replacement behavior over time.
Replacement cycles in the PC industry are getting longer, most likely because today’s first-time buyers don’t have the same love of computers as the early adopters who purchased PCs at the beginning of Gordon’s data set. Though many consumers are still driven to purchase every new upgrade, more first-time buyers today are tech neophytes and will therefore wait longer to make replacement purchases, Gordon found.
As a result, the industry’s traditional reliance on technological innovation to spur replacement purchases may not work going forward. Rather than expecting consumers to replace their PCs strictly for faster processing speeds, Intel and AMD have begun to diversify their offerings to boost replacement purchases. Intel is now marketing combo chips that bundle TV-tuner, wireless and graphics technologies, while AMD is promoting its processors’ power efficiency.
Gordon’s model shows that these types of strategies are exactly what high-tech firms need to embrace. Companies in any consumer goods market characterized by rapid innovation must alter their strategies to account for the replacement habits of a changing customer base.
Firm managers, marketing managers
By tracking and accounting for consumer replacement cycles, you can tailor pricing decisions and new product offerings to target consumers that are likely to make replacement purchases in the near future.
Volume: 28 | Issue: 5 | Pages: 846-867
Publication type: Journal article