Using e-auctions to reduce uncertainties in new product launch

Launching a radically new product brings some undeniable strategic advantages but comes at the price of high risks.

Radical innovators will enjoy the first mover-advantage. They will be alone on the market for some time, especially if their new product is difficult to copy. Even after competition has developed, they will still be remembered has the pioneers and that will help them keep their brand strong on the market.

However radical innovation strategies are, by nature, risky. When a company decides to invest in the development of a radically new product, it generally doesn’t have accurate information on the new market at hand. So it is making a very uncertain bet.

Usually the way to reduce these uncertainties on the size of the market and the price people will be willing to pay for that product is to conduct some market testing. Recently, through three articles (An Exploratory Study on the New Product Demand Curve Estimation Using Online Auction Data, Radically New Product Introduction Using On-line Auctions ), I have discovered an interesting tool to quickly and efficiently run those market tests: e-auctions.

How does e-auctions work?
The Company sets up its own auction platform. Before the auction takes place the company produces a prototype of the new produce to give customers an experience of what it will be like to use this product. It can even be a virtual model. Then these potential consumers are invited to participate into an auction online. They will bid real money and the winner will get the finish product when it is launched (if the company decides not to launch the product, he gets his money back). The auction has to be a sealed-bid auction so that all the bidders will bid independently and only the auctioneer (the company which launches the new product) will have access to all the bids. Each bid represents a "Willingness To Pay" (WTP) for the product.

With these data the company can draw the demand-price curve for the bidders and then extrapolate this curve for the whole market. However it has only assessed the WTP in an e-auction context.

In fact, the WTP will change depending on which channel is used to distribute the product. Some people are uncomfortable using the Internet. An auction might seems more complicated and more risky than just buying the product in a store. For all these reasons the WTP price using an e-auction channel will generally be lower than in a e-shop or in a regular retail store. So the Company has to determine the Internet skill level and sensitivity to the time it takes to make the transaction of the bidders. Then it can extrapolate the demand-price curve for different distribution channels.

Why use e-auctions?
• Tested consumers are putting their money where there mouth is, so the value they give can be trusted.
• E-auctions are cheaper than a regular group test.
• They are fast.
• Using Internet enables to tap in a wide spectrum of the population, geographically spread.

In conclusion, although e-auction won't give perfectly accurate results, especially has the extrapolation phases will introduce some "white noise", its seems a promising way to get more accurate data on demand and price, cheaper and quicker than with conventional group tests.