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Is word-of-mouth a friend or an enemy of new product launches?

Customer promotions play a critical role in product launches. However, their effectiveness depends on market dynamics, including word-of-mouth or WOM. While positive WOM can lead to heightened profits for retailers, negative WOM can be devastating. Therefore, when launching a new product, retailers must incorporate proper management of WOM into their promotion strategy.

Current standard practices for new product launches include using promotions to notify customers about the product. The efficiency of sales promotion policies depends on market dynamics, and one factor in market dynamics is word-of-mouth (WOM). As per an oft-quoted study, 92% of customers’ purchase behaviour is affected by the opinions of friends and acquaintances . The importance of positive WOM in making a product launch a success cannot be understated. However, WOM is also likely to be negative and to hurt the launch campaign. Retailers, therefore, must tackle the problem: How can they incorporate WOM into their promotion planning for product launches to optimise its impact? A study investigates the relationship between sales promotion and WOM to answer this question.

The study ran a significant number of simulations of customer purchase behaviour based on customer attitudes to new products, the impact of promotional activities, service factors like product availability and consumer satisfaction, WOM corresponding to each of these situations, and their impact on potential consumers. It found that a launch promotion plan that incorporates WOM tends to lead to greater profit for retailers. The margin over a plan that does not take WOM into account can be between 2.32% and 4.78%.

However, retailers must consider several factors when incorporating WOM into their promotion policies. The role of social media is one such factor. In the US, each day, there more than 2.1 billion WOM conversations on social media. This is also called electronic WOM or eWOM. Such a network of conversations about a new product can make or break its launch, depending on the directions of the conversations . So, retailers need to be proactive about incorporating WOM (and eWOM) in their promotion policy and steering it in the desired directions.

Retailers must also maintain high levels of service to ensure retention of positive WOM regarding their product. This is critical as a gap between expected and actual levels of service can lead to low customer satisfaction, which is amplified by WOM since negative WOM spreads far quicker than positive WOM and is believed more readily by people. In such a situation, increasing WOM will only hurt the retailer’s profits.

The study has significant implications for retailers. First, they need to consider the impact of WOM when designing their launch promotion plan, especially for products like health and beauty products and services like health and beauty services, restaurants, and online education, since these products and services are highly sensitive to WOM.

Second, retailers should offer higher discounts soon after the product launch and push WOM at the same time. The volume of discounts, though, should change during the middle of the sales horizon with lower discounts for the types of products and services mentioned in the previous paragraph, and higher for products that are not sensitive to WOM, such as hygiene or grocery products, generic products, or products that are not interesting to talk about.

Finally, retailers need to be active in controlling negative feedback for the products and services that are sensitive to WOM. In case of any negative customer experience, they should adjust their contribution to WOM and take necessary measures to reduce the likelihood of negative WOM from the affected customers, especially through active grievance redressal.

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