Managing Reference-Group Effects in Sequential Product Upgrades

Recent technological advances have created unprecedented opportunities for consumer technology products to assume a new role, that of representing users’ social status. We study how social-reference-group effects impact firms’ product pricing, design, and targeting strategies. We find that, in a commonly-adopted strategy, Sequential Adoption, where early adopters (leaders) upgrade to a new version when new customers (followers) arrive and adopt the original version, a firm could benefit by leveraging a push effect on leaders who desire to escape from using the same version as followers. However, a strong reference-group effect can also hurt the firm due to a pull effect from the new version on followers who desire to assimilate with leaders. We then study how the firm should differentiate its product versions in two dimensions, functionality and exterior appearance, by leveraging the reference-group effect. We identify three optimal design policies: Functional-Only Differentiation, Joint Differentiation, and Exterior-Focused Differentiation, which differ in the firm’s focus on the two design dimensions. Two factors, the strength of the reference-group effect and the base functional value of the product, jointly determine the conditions under which each design policy dominates the others.