When a company comes out with a new product, its competitors typically go on the defensive, doing whatever they can to reduce the odds that the offering will eat into their sales. Responses might include cranking up marketing efforts, offering discounts to channel partners, and even lobbying for regulations that would hinder the rival’s expansion. In many cases, though, such actions are misguided. Although the conventional wisdom that a rival’s launch will hurt profits is often correct, my research shows that companies sometimes see profits increase after a rival’s rollout—even when they don’t aggressively seek ways to squelch the new product’s sales.
The underlying mechanism is pretty simple: When a company extends a product line, it often raises the prices of its existing products. The hikes might be designed to make the new product look cheaper and thus more attractive by comparison or to capture the value customers place on a broader line of offerings. As that company adjusts its pricing, its competitors can follow suit without risking customer defections over price.
Consider what happened when Yoplait became the first major producer to market low-fat yogurt in the United States. Although Dannon took a 5% hit in units sold during the new product’s initial year, the vast majority of its customers didn’t defect to Yoplait; they preferred Dannon’s style of yogurt. And because Yoplait had raised prices across its product line, Dannon raised its prices as well, by more than 10%. So despite the 5% decrease in volume, Dannon’s revenue increased by 5%.
Via Ashish Umre