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Marketing Spending for New Product Introduction: Entrant Strategy and Incumbent Response

Venkatesh Shankar, 1998 [98-129]

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Firms are constantly introducing new products and reacting to new entries in their markets. Of particular importance to marketing managers are entry and reaction strategies involving marketing spending variables such as advertising, promotion, and sales force. If managers can better understand the determinants of both new product introduction and incumbent response strategies, they can manipulate these marketing spending variables more effectively.

For example, does a new brand enter more aggressively if it anticipates an aggressive reaction, a mild reaction, or no reaction from incumbents? Does the size of incumbents affect its strategy? Does it enter with greater or smaller introductory spending if it competes with one or more incumbents in additional markets? The answers to these questions can help an incumbent plan a better reaction strategy.

Conversely, how does the aggressiveness of a new brand's marketing campaign influence the intensity of an incumbent's reaction? Does an incumbent respond aggressively if it competes with the entering firm in other markets? The answers to these questions can help entrants formulate better introduction strategies.

Study and Findings
In this study, author Shankar addresses these issues via a study of the determinants of both new product introduction strategies and incumbent response strategies in a single integrated framework. The study covers 23 new product entries and the responses of 59 incumbents to those entries in six leading pharmaceutical markets.

The results show that a new product enters with aggressive (passive) marketing spending if it anticipates mild (strong) reactions from large incumbents. Marketing spending is, however, unrelated to expected reactions from small incumbents. In a similar vein, an incumbent responds aggressively (passively) if it encounters a new entrant with low (high) introductory spending. Interestingly, both new entrants and incumbents spend less on advertising and sales force if they compete with one another in at least one other market.

The study also provides a clear profile of the most aggressive and passive entrants and incumbents. The most aggressive entrants are large firms that expect mild reactions from large incumbents and that have no multimarket contact (contact in additional markets) with the incumbent firms. In addition, they tend to be leaders in marketing mix variables, have higher relative product quality, and already have some experience in the market. The most passive entrants are the opposite. The most aggressive incumbents are those that encounter entrants with little market experience and low introductory marketing spending, and that have no multimarket contact with the entrants. They also tend to be dominant in their markets, are effective competitors, and lead other firms in marketing mix variables. They have a greater propensity to be aggressive toward new products with higher relative quality that are entering on a small scale in large, growing markets. The most passive incumbents exhibit the opposite characteristics.

Managerial Implications
Given those profiles, entrants that want to minimize responses from large incumbents in a market should enter on a large scale with substantial marketing spending, and they should enter multiple markets. An entrant's presence in multiple markets would increase the likelihood of contact with the incumbents, leading to lower anticipated response from the incumbents.

For their part, large incumbents that wish to discourage heavy spending by firms introducing new products should consider retaliating to a new entrant strongly so that they can show future entrants what to expect. They should also consider deploying products of high relative quality, thereby lowering new entrants' relative product quality. Finally, they should increase their presence in multiple markets.

Venkatesh Shankar is Director, Quality Enhancement Systems and Teams (QUEST) Program and Assistant Professor of Marketing, Robert H. Smith School of Business, University of Maryland. Email address: vshankar@rhsmith.umd.edu

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