Optimal promotional mix and pricing when faced with uncertain product value

Abstract

The rapid development of digital technology has facilitated firms to adopt a variety of innovative strategies for promoting their new products. However, as different promotion strategies have different implications on market reach, consumers’ information structure, and incurred cost, figuring out how to minimize wastage on marketing expenditure with a combination of multiple promotion strategies remains a challenging task. To provide insights into the efficient adoption of a promotional mix, we develop a stylized model that considers a firm selling an innovative product to a market wherein the product value is ex ante unknown to each consumer and the firm. The firm has two promotion strategies, hype advertising campaign (HAC) and referral reward program (RRP). Specifically, HAC refers to a basic publicity that aims only on raising product awareness through an extensive market reach. In contrast, in line with the pay-for-performance nature, RRP is an incentive-based program that offers rewards to the existing customers for bringing new buyers through consumer-to-consumer (C2C) referrals. Whereas both strategies allow previously ignorant consumers to learn of a product’s existence, due to the variation on the communication intensity, only those who become aware of the product through C2C referrals will be able to make an informed purchase decision. We find that both HAC and RRP should not always be adopted simultaneously since consumer referrals may intensify the wastage on HAC expenditure. The condition under which the promotional mix yields the optimal outcome and the circumstances when the firm should abandon either HAC or RRP are investigated.