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代寫Journal of Management Information System

    Journal of Management Information Systems / Fall 2008, Vol. 25, No. 2, pp. 13–40.
    © 2008 M.E. Sharpe, Inc.
    0742–1222 / 2008 $9.50 + 0.00.
    DOI 10.2753/MIS0742-1222250202
    How Information Changes Consumer
    Behavior and How Consumer Behavior
    Determines Corporate Strategy
    ErIc K. clEMONS
    E ric K. c lEmons is a Professor at the Wharton School, University of Pennsylvania,
    where he has served since 1976. His visiting appointments include Harvard University,
    cornell University, Hong Kong University of Science and Technology, and the Indian
    School of Business. He serves on the editorial boards of the Journal of Management
    Information Systems and the International Journal of Electronic Commerce. His
    research specialties are in the areas of IT and business strategy and IT and financial
    markets. More specifically, he studies the impact of technology on consumer behavior,
    analyzing investments in strategic IT ventures, managing the risks of strategic outsourc-
    ing, managing the risk of strategic IT implementations, and strategic implications of
    e-commerce for channel power and profitability. He is the Director of the Wharton
    School’s Sponsored research Program in Information, Strategy, and Economics; the
    Area Head for Information, Strategy, and Economics; and program coordinator for
    the school’s major in e-commerce. He also is the founder of the Hawaii International
    conference on System Sciences’ (HIcSS) annual competitive Strategy, Economics,
    and Information Systems mini-track, which had its twentieth anniversary meeting in
    January 2007, and the winner of two HIcSS Best Paper awards.
    A bstrAct : Information availability has increased consumers’ informedness, the degree
    to which they know what is available in the marketplace, with precisely which attributes
    and at precisely what price. This informedness has altered the demand side of market
    behavior: customers now discount more heavily when comparable products are avail-
    able from competitors and when products do not meet their wants, needs, cravings, and
    longings, but they no longer discount as heavily when purchasing unfamiliar products.
    changes in the demand side are producing comparable changes in the supply side: firms
    earn less than their expectations when competing in traditional mass-market fat spots,
    while earning far more than previously when entering newly created resonance market-
    ing sweet spots. We trace the impact of hyperdifferentiation and resonance marketing on
    strategy, with a clear progression from a limited number of fat spots, through reliance
    on line extensions, and ultimately to fully differentiated market sweet spots.
    K Ey words And phrAsEs : consumer informedness, long tail, marketing strategy, online
    reviews, resonance marketing, word-of-mouth marketing.
    context
    t his pApEr offErs A modEst contribution to marketing strategy, based on years of
    research into marketing strategy, pricing strategy, product design, promotion, and
    14 ErIc K. clEMONS
    the impact of consumer-generated content on consumer 1 purchasing behavior. The
    research that underlies this paper was conducted with faculty colleagues from numerous
    institutions, with consultants, and with experts in disciplines ranging from informa-
    tion technology to anthropology. This research suggests that information availability
    and the use of this information by consumers has so profoundly affected consumer
    purchasing behavior that all of the underlying premises of corpo rate strategy require
    careful reexamination.
    In particular, slowly at first, but in an increasing range of product categories,
    changes in con sumer behavior will alter the fundamental four Ps of marketing beyond
    recognition. The old four Ps [25, 27] assume that price, promotion, product design,
    and physical placement and distribution are largely elements of marketing strategy
    that can be determined by the firm. In many categories, this is now quaintly obsolete;
    pricing is determined by what the consumer is willing to pay, promotion is increas-
    ingly determined by online user-generated content, product design is based on filling
    gaps in the marketplace that correspond to strong consumer preferences, and physical
    placement is irrelevant because everything is available online from everywhere and
    to everyone.
    • Pricing will be largely determined by the marketplace, by what the consumer
    knows, and by the context of competitive offerings. The New York Stock Ex-
    change (NYSE) discovers prices for stocks through the confluence of supply
    and demand; no one at the NYSE can realistically expect to set the prices of
    NYSE-listed stocks at levels other than that which investors believe are fair and
    accurate trading prices. Orbitz does not set prices, but it enables the real time
    online pari-mutuel mall of air travelers to set prices, much as the crowd on the
    trading floor and the larger crowd behind it sets prices in financial markets.
    • Promotion likewise is becoming organic and largely outside of a company’s direct
    con trol; increasingly, promotion is determined by the reported experiences of
    other consum ers. Where once marketing and advertising controlled a consumer’s
    perception of a firm and the firm’s image in its marketplace, consumers’ access
    to online content, especially user-generated content and user-generated product
    reviews, is beginning to determine consumers’ perception of a company and its
    offerings. This is particularly significant to the success of launches of superpre-
    mium and hyperpremium new offerings, where total market share is expected
    to be too small to justify traditional promotional efforts. Most of the most suc-
    cessful new beer launches, soft drink and premium ice tea launches, power bar
    launches, and highly successful high-margin new consumer product offerings
    in a wide range of categories have never been advertised and have never been
    formally promoted, and yet they succeed, largely on the basis of word-of-mouth
    and “word-of-mouse” promotions [35]. Most of the 500 top-ranked beers in the
    United States have never been advertised 2 ; in a year in which Miller Brewing
    chose to focus on this attrac tive market segment, promotional expenditures were
    reduced by a third, while profits increased by the same amount [30].
    • Product offerings will be determined less by what a company has always done
    well (e.g., cheerios, Fig Newtons, or Budweiser) and less by near neighbors for
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 15
    those old standbys (Honey Nut cheerios, raspberry Newtons, or Bud light, Bud
    Ice, and Bud Ice light). They will be determined more by consumers’ strong
    preferences for unserved and underserved market offerings. That is, a firm’s offer-
    ings will increasingly be determined by consumers’ preferences and willingness
    to pay, and less by the firm’s preferences, traditions, and existing competence.
    • Product placement and physical distribution are becoming increasingly irrelevant.
    As Anderson [2] and Brynjolfsson et al. [7, 8] note, almost everything will be
    available to almost anyone, almost anywhere, using online distribution.
    Much as changes in consumer behavior are forcing a revision of marketing strategy
    and the four Ps, the same changes in consumer behavior likewise are forcing a reevalu-
    ation of the range of applicability of Porter’s work on the Five Forces that determine
    competitive strategy. Porter’s Five Forces model [34] focuses on corporations, and
    specifically on the role of (corporate) suppliers, (corporate) producers of substitute
    products, (corporate) new entrants, and (corporate) competitors; only buyers may, for
    some companies, be individuals rather than still more corporate entities. Of course,
    Porter’s work is not wrong; however, as we move to a world of truly informed and truly
    empowered individuals, the behavior of individuals becomes at least as important as
    the role of other corporations when determining corporate strategy. Individuals, their
    wants and needs, cravings and longings, current shopping patterns, and unmet latent
    prefer ences, will become as important to the determination of corporate strategy as a
    review of com petitors and their current portfolios and prospective new offerings.
    The premise of this paper is that there has been change in consumer behavior, the
    demand side of the market, which has resulted in a change in the competitive strategy
    of firms, the supply side of the market. And yet consumers’ underlying wants, needs,
    and desires have not been profoundly altered; likewise, firms have not changed what
    they want to do, which is to maximize their profits. What has happened? We will
    demonstrate that a profound change has occurred, not in the objectives of firms or
    in the motivations of individual consumers, but rather in the informa tion available to
    all consumers. The effortless access to timely and accurate information has enabled
    consumers to manage increased choices better than ever before; if what they want is
    available in the marketplace, they now truly can and will find it, and if the price is
    right, they will purchase it. likewise, since for the first time consumers can find what
    they really want, for the first time it is now fully possible for firms to provide what
    consumers want, in all its myriad op tions.
    The order of causality is clear: information is available and the marketplace is more
    transparent than ever before. consumers can now optimize their choices. Firms can
    now optimize their selection of offerings. consumer choice drives corporate selection,
    corporate selection drives consumer choice, and both are driven by greatly enhanced
    information. Firms have divided huge mass-market fat spots into highly resonating
    mass-margin sweet spots, and consumers find and pay for what they want.
    By now we are all familiar with the long tail of distribution [2], which notes that
    retailers have greatly increased the set of choices available to consumers, and that more
    and more consumers are selecting items from among the least popular elements of
    the set. Not all selections are equally popular with consumers; fermented teas such as
    16 ErIc K. clEMONS
    Earl grey or minimally processed green teas may not have mass appeal and Hawaiian
    peaberry coffee may lack the kick of Vienna roast colombian. Zappos offers 809
    styles of performance running shoes and 367 styles of basketball shoes; the numbers
    drop to 698 and 349 for size 11 medium and plummet to 208 and 48 styles for size 15
    medium. Baseball shoes are more popular than wrestling or volleyball (144 styles for
    baseball, 22 for wrestling or volleyball shoes), and all are more popular than rugby
    (one style of rugby shoe). Far more American consumers use dried cayenne pepper
    (heat level of perhaps 30,000 Scovilles) than use dried piquins (with a Scoville heat
    level four times hotter) although almost any pepper can now be located online with
    equal ease. 3 The long tail arises, in part, be cause although consumers can now find
    everything with equal ease, they make choices based on preferences that most definitely
    are not distributed equally. Where once we all selected from the limited selection
    we could actually find, we now select from all available options, and some choices
    simply are not as popular as others. This change in consumer purchasing behavior is
    not about trading up, or the sale of luxury goods [39]; it is not elitist, catering to the
    wealthiest, or about mass affluence and catering to the merely slightly wealthy [32].
    It is about trading out, or the sale of goods that precisely match the wants and needs,
    cravings and longings of small groups of consumers. It is not about being better in
    any absolute sense; it is about being better for each of your customers. It is not about
    the long tail of distribution, but the long tail of informed selection.
    This work focuses on the implications of selection and choice for all aspects of the
    firm’s strat egy, which have been redefined by the subtle but inexorable increase in
    information available to the consumer and to the firm. This change in information is
    so complete and so profound that we need a new word for it. Economists and game
    theorists talk about information endowment, or what players know at the start of a
    game; that term is too static for the degree of information immersion that we see today.
    Popular usage refers to awareness, but that does not capture the intensity or the intimacy
    that we need. Informedness in an online and wired world allows con sumers to know
    everything they want to know about products and services of interest to them:
    • What is available?
    • At what price?
    • Where?
    • And with a precisely understood set of attributes.
    likewise, producers and retailers know at least as much as consumers, and this allows
    them to make an all-important inference about the unmet wants and needs, cravings
    and longings of the marketplace. In a world of wired informedness, consumers can
    find what they want if it is avail able, and firms can identify the unserved and under-
    served segments of the market and can address them with new offerings of goods
    and services. 4
    The origins of consumer informedness have been the subject of much discussion and
    debate. Some is no doubt due to the reduction in search costs [4]. Some comes from
    recommender systems and recommendations made to the consumer by collaborative
    filtering [35] systems used by retailers such as Amazon.com. And some informedness
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 17
    comes from reviews posted on retailer Web sites such as www.amazon.com, from
    online social networking community rating systems such as www.ratebeer.com or
    www.tripadvisor.com, or from third-party reviewing sites such as http://wordofmouse.
    com or www.dpreview.com/reviews [10, 12, 16, 17, 18, 38]. The impact of commu-
    nity content on consumer behavior appears clear, even if monetization of this impact
    remains uncertain [12].
    Hyperdifferentiation and resonance Marketing
    t hErE is now morE choicE in thE mArKEtplAcE than ever before. Supermarket ice
    cream now has not just more flavors, but more categories, including premium (Ben
    & Jerry’s), superpremium (godiva), and for those willing to search online even
    hyperpremium (graeters). 5 Where once we ate candy bars when hungry, or power
    bars from PowerBar, we can now choose from several hundred power bar offerings.
    Power bars’ manufacturers promise weight loss (Atkins) or muscle mass and weight
    gain (Next Nutrition), for men (clif) or for women (luna). Weight lifter power bars
    (Detour) would never be used in place of golf power bars (1st Tee), and indeed the
    slow energy release needed for a golfer on the first tee (1st Tee) would never satisfy
    the energy needs of a golfer rounding the turn (for which he or she would grab a 10th
    Tee). A single Web site (www.allstarhealth.com) now lists over 80 low-carb bars and
    close to 500 nutrition and power bars. Similar data can be obtained on the number of
    ice teas, Ben & Jerry ice creams, Starbucks coffees, SUVs, breakfast fast foods, or,
    indeed, almost any consumer product or service.
    The ability of firms to produce almost anything that any potential customer might
    want is called hyperdifferentiation [14, 15]. Hyperdifferentiation is more than just
    differentiation, line exten sions, or varying the quality of information goods through
    versioning [42]. This is certainly more than the increased complexity of product port-
    folios as firms attempt to compete. Hyperdifferentiation is the ability to alter flavors in
    food and beverage products; vary parameter settings in software that supports service
    offerings; change colors or styles or options packages in consumer durables; or in
    some way develop, market, and sell anything the firm chooses to offer.
    Hyperdifferentiation is enabled by information, and information allows hyperdiffer-
    entiation to generate unprecedented profitability. There is no point in offering new and
    unique products and services if your potential customers cannot locate them or do not
    know what they are. The Beeryard (www.beeryard.com) is a small beer wholesaler in
    western Pennsylvania. Before the creation of its Web site, 90 percent of its sales were
    to customers within 10 miles of the store; that is, virtually all were within the store’s
    local county. With the development of its Web site, it became possible for Web surf-
    ers to search The Beeryard for hard-to-find beers. One click gets them a list of recent
    arrivals, from the previous week, two weeks, a month, or two months. A second click
    gets them access to details on the brewer, the type of beer, and the brewer’s description
    of this particular beer. One more click takes them to www.ratebeer.com, a community
    of beer aficionados, where they can obtain reviews from dozens, or even hundreds, of
    reviewers. Yet another click enables them to examine an individual reviewer’s reviewing
    18 ErIc K. clEMONS
    history, to determine if his or her impressions are likely to be a good predictor of your
    own. This Web site has profoundly altered the sales pattern and the profitability of
    The Beeryard. Although Pennsylvania state law does not allow beers to be sold and
    shipped out of state, it is legal for out-of-state shoppers to reserve beer online and to
    drive to Pennsylvania to buy beer; management of The Beeryard estimates that more
    than two-thirds of their premium beer sales now arrive from outside their 10-mile radius
    and more than one-third are from out of state, throughout the Northeast. Because rare
    beers suffer little or no competitive price pressure, the margins on an $85 or $120 case
    of beer are much more attractive than the margins on a $17.95 case of Budweiser. It
    is important not to underestimate the power of the informedness generated by The
    Beeryard’s Web site. Shoppers will not drive from Virginia to Pennsylvania unless they
    know the beers they are seeking are actually available and unless they are convinced
    that the beers are truly worth the trip.
    The essence of resonance marketing is harnessing and guiding the supply side of
    hyperdifferentiation [13, 14]. Although the firm can now make whatever the firm
    wants to make, it is most beneficial to produce exactly what the firm’s customers want
    to buy. It is technically feasible to make products that are so extreme that they have
    almost no appeal, such as beers that are too bitter, for example, or fuel-efficient cars
    with too little acceleration, or portable personal televisions with screens that are too
    small. It is also dangerous to assume that products are too extreme to sell because
    they have never sold in the past, as the runaway success of American superhopped
    India Pale Ales, Prius hybrid automobiles, or 5th-generation iPod Video players has
    demonstrated. consumer purchasing behavior truly has changed, and consumers truly
    are better off as a result [7, 8].
    resonance marketing requires understanding the demand side, so that the firm knows
    what each customer segment wants to buy, and how much each segment is willing to
    pay to get it. It is about achieving a precise fit not only with consumers’ wants but also
    with their previously unsatisfied wants and needs, cravings and longings. It is about
    being uniquely better at giving the consumer what he or she truly has always wanted,
    and about reducing the role of price in the consumer’s shopping decisions.
    resonance Marketing’s Whole New Mind-Set
    r EsonAncE mArKEting rEquirEs An EntirEly diffErEnt mind - sEt from producers and
    retailers than they have had in the past, and a high degree of confidence in, even pas-
    sion for, their products. It is no longer sufficient to get the largest number of potential
    customers to like your product. For resonance products, a consumer’s liking the
    product is not enough reason for the consumer to become a customer and to buy it;
    the consumer has to love the product to pay a premium price for it, and without love,
    your product becomes merely a commodity offering.
    When Victory Brewing company launched its first three beers in 1996, it started
    with Fest (in the style of an Oktoberfest), Victory All Malt lager (its answer to the
    popularity of Budweiser, Miller genuine Draft, and coors Original), and Hop Devil
    (the brewmaster’s personal favorite at the time). Victory had high hopes for the lager,
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 19
    but was worried about the market response to its audacious Hop Devil. The lager is
    actually quite good, and everyone likes it; it scores an average rating of 3.4 out of 5
    on ratebeer.com, and places in the ninetieth percentile of all lagers. Unfortunately,
    no one buys it; with its higher-cost ingredients and resulting higher price, consum-
    ers shun it in favor of the adequate and much less expensive offerings from the big
    three brewers. In the resonance marketing arena, being good enough simply is not
    good enough.
    In contrast, the bitterness of Hop Devil is striking, as in, “Balance? We don’t need
    no stinkin’ balance!” In the IBU (International Bitterness Units) scale used to mea-
    sure the bitterness of beers, Hop Devil is 400 percent as bitter as the average bland
    but popular American lager. In contrast to the generic hops used in Bud, coors, and
    Millers, Hop Devil uses American Northwest cascade hops, with strong flavors of
    orange peel, grapefruit, and pine tar. Most people when first exposed to Hop Devil
    immediately hate it, and many find that they need to spit it out. Few like it. But some
    love it, and those are Victory’s target market for this beer. customers who loved Hop
    Devil could not find any thing like it on the East coast, and the $28 price, nearly twice
    that of Budweiser, was irrelevant. The beer was an immediate hit, and although sig-
    nificant competition has emerged in the decade since it was introduced, and although
    Victory has greatly extended its line of beers, Hop Devil still accounts for 47 percent
    of Victory’s sales.
    Unrewarded Excellence and consumer-Imposed Discounts
    w hilE rEsonAncE mArKEting is rEwArding firms that embrace it, firms that continue
    with a strategy of being good enough are suffering. general Motors is about to lose
    its position as the world’s largest car company to Toyota, and yet by any objective
    measure of quality, general Motors’ cars are better than they have ever been. It is
    just that Toyota’s cars are more interesting, and consumers are far more likely to be
    passionate about a Prius hybrid than about a Buick. Supermarket sales in traditional
    categories such as ice cream, coffee, soft drinks, and candy bars are flat, while sales
    have exploded among superpremium offerings in ice cream, bagged instead of canned
    coffee, all fruit smoothies (Naked) and premium ice teas and other noncarbonated
    beverages, and power bars. Specialty products offered by subscale upstarts that are
    positioned around the edges of major categories account for all the growth in some
    categories, such as coffee and soft drinks; in others, such as ice cream, the premium
    and superpremium brands now account for all the retailers’ profits for the entire cat-
    egory. Firms are losing to companies that did not exist until recently, selling products
    that they seldom if ever advertise, in categories that industry incumbents thought were
    too small to matter.
    Why are growth and profitability stalling in the traditional middle of the market? The
    problem is that too many firms are competing for the same market fat spots, offering
    similar products, all with adequate quality, and all aimed squarely at the same huge
    concentration of consumers in the middle of the market. These products are easy to
    describe and aimed at the taste of the largest number of consumers. Since competitors
    20 ErIc K. clEMONS
    have chosen the same fat spots, and are offering similar products, targeted at the same
    group of consumers, brutal price-based competition has become the norm. And yet
    increasing numbers of customers are selecting highly differentiated products, which
    were aimed at small sweet spots around the fringes of the category. Increasingly, what
    these sweet spots lack in profitability due to small size they will make up through
    superior margins and through the larger number of sweet spot offerings provided;
    indeed, that is the intent of a sweet spot resonance marketing strategy. 6
    Why has consumers’ purchasing behavior shifted so dramatically? Why are previ-
    ously success ful firms finding their strategies now ineffective, why are their profits
    declining, and why are they suffering from unrewarded excellence? The answer is
    that customers finally know—accurately and with certainty—what is available to
    them. The customer can now trade out, trade up, or trade down because the customer
    knows what he or she wants, knows what is available, knows where to find it, and
    knows what it costs. 7
    • For categories that do not matter to the customer, he or she is able to find the
    lowest possible price for an offering he or she considers adequate; the competi-
    tion discount is as large as it has ever been. Thirty years ago a discounted airfare
    between Philadelphia and San Diego on United was close to $500; with excess
    capacity and easy online price com parisons, the fare today is under $400 on the
    same carrier, despite an 80 percent increase in fuel costs.
    • The customer can find and can get exactly what he or she wants; the customer
    will no longer accept a product that does not fit his or her preferences unless it is
    substantially less expensive. With perfect information, the customer can determine
    which airlines fly into Heathrow, a modern airport relatively convenient to the
    West End of london, and which fly into gatwick, with much older facilities, and
    requiring a train ride into a station, and then physically dragging bags off and
    hunting for a taxi. The customer may still be willing to fly into gatwick, but he
    or she will insist on paying less for this. Perfect information and the increase in
    choice combine to make the compromise discount as high as it has ever been.
    We now see why merely being good enough is no longer good enough.
    • Finally, and most importantly to the success of resonance marketing, the customer
    can find what he or she truly wants, and can determine what it truly is and what
    it truly offers. The customer knows what he or she is getting and knows that he
    or she is getting exactly what he or she wants, even for first-time purchases and
    even if he or she is not familiar with the product or its producer. The customer
    no longer feels he or she must pay less because he or she is no longer worried
    about whether he or she is getting a perfect fit with his or her preferences; now
    the customer knows he or she is getting a per fect fit and the uncertainty discount
    has been eliminated. (This last point is explained in more detail below.)
    These changes are so profound they go beyond mere awareness, and become true
    customer informedness.
    While small companies or small brands provide most of the best current examples of
    resonance strategies, there are enough examples of big company success, such as the
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 21
    Toyota Prius or the Apple iPod, to suggest that resonance marketing will be essential
    to the profitability of all suc cessful consumer product companies.
    The Theory—How Important Is Uncertainty?
    i t hAs long bEEn Known thAt customErs ’  willingnEss to pAy for a specific product is
    determined both by their willingness to pay for their ideal product and by how closely
    the product they are considering matches or how much it deviates from this ideal.
    Hotelling [23], Salop [37], and others model the difference between a customer’s
    ideal choice and an offering being considered as fit, shown by the distance between
    the customer’s ideal selection and the actual offering. A greater distance between
    customer preferences and a specific product results in worse fit, and higher fit cost,
    which reduces the customer’s willingness to pay for the offering. We can summarize
    this by saying the compromise discount simply measures the distance between the
    customer’s ideal choice and the actual offering.
    To make this concrete, consider a student preparing for an interview. His ideal choice
    might be a 42 regular blue pinstripe suit, represented by the central asterisk (*) in
    Figure 1, with corresponding will ingness to pay V, the maximum he will pay for any
    suit. The student would be less pleased with a gray pinstripe, and a gray 44 would
    require significant alterations, and both would greatly reduce the student’s willing-
    ness to pay for the gray suit. In this figure, the horizontal or x-axis represents the set
    of all possible suits in some hypothetical and abstract suit-description space. Since
    all consumers will have different preferences, another student, taller, might prefer a
    larger suit, whereas a student with a different collection of dress shirts might prefer
    a different color. These other students would have their own asterisks located at a
    different point along the suit-description space, and their willingness-to-pay curves
    would peak over their own asterisks. 8
    The horizontal line X in Figure 1 measures the distance between the location of the
    first student’s ideal suit (at the *) and the 44 gray suit in the abstract suit-description
    space. The vertical bar c measures the reduction in the student’s willingness to pay,
    caused by the compromise discount that results from the distance X. All suits can be
    located somewhere in their suit-description space, and differences among suits can
    be captured by their location in this space. likewise, all consumers have an ideal suit,
    and therefore consumers can likewise be located somewhere in suit-description space
    by the position of their ideal suit. This works equally well when describing consum-
    ers’ preferences for hotels, sports cars, or beer and coffee; products can be located
    in their product-category description space, as can consumers’ ideal purchases. We
    have always known that fit matters, both in size and in consumers’ preferences; none
    of this is new.
    capturing the effects that uncertainty has on consumer behavior has historically
    been too com plex to model precisely. Indeed, it has been complex enough that most
    economists have not attempted to incorporate it into models of consumer choice;
    but because the reduction in uncertainty is one of the most important effects of the
    new network economy, it is essential that we at least express qualitatively the effects
    22 ErIc K. clEMONS
    of uncertainty reduction. Figure 2 shows a potential customer whose ideal product
    (still a blue pinstripe suit) is located at *P, and who believes that the suit is likely to
    be a located at *P, but who believes that there is a considerable band of uncertainty
    concerning the actual suit that he will be shipped, as shown in the band of uncertainty
    centered around *P. This potential customer believes that the first suit is most likely
    to be a 42 regular blue pinstripe, but has a considerable range of uncertainty (the dark
    bar) centered around its expected location. There is now a wide range of actual suits
    that he might receive; some will be a little too big, others will be a little too small,
    some may be a little too dark, and others may be a little too light. While this range still
    includes his perfect suit, it now includes some that are certainly not perfect. The range
    of suits has a range of values to him, and all of the values introduced by uncertainty
    are less than his ideal willingness to pay, V. The suit he actually receives may be as far
    to the left in suit-description space as Xl, or as far to the right as Xr. His willingness
    to pay for suits on the left side of the band of uncertainty is the average of the left
    side, that is, the average of the range Xl to V, or Xa, and his willingness to pay on the
    right side is the average of the right side, from V to Xr, also Xa. consequently, his
    willingness to pay for the suit is reduced to Xa; even though the range is centered at
    the ideal position, the average over all suits in the range is less than V. This explains
    the size of the reduction in willingness to pay, or the uncertainty discount, the vertical
    bar U in Figure 2.
    But how will uncertainty affect a potential customer’s willingness to pay for products
    that he or she expects will be significantly less than perfect for him or her? Interest-
    ingly, uncertainty has no impact on consumers’ willingness to pay for products that
    are significantly removed from their ideal product choices. Now consider a consumer
    c whose ideal suit would be located at *c, as shown in Figure 3. This consumer has a
    different willingness-to-pay curve from that of a consumer whose ideal product would
    be at *P, shown as the inverted V shifted to the right (relative to the original curve),
    with its peak over *c. There is still a range of uncertainty, indicated by the bar of
    uncertainty centered around *P, the expected location of the available suit. Thus, there
    is still a range of suits that the consumer may receive, each with a different value, and
    once again, the value the consumer places on the suit that he thinks he will get will be
    the average of the set of suits he might receive. Some suits in the range will be closer
    Figure 1. The compromise Discount c reduces consumers’ Willingness to Pay for Products
    with Poor Fit
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 23
    to his ideal than the suit at *P and some will be further away. Some will have higher
    values to him than the suit at *P and some will have lower values to him. The range
    of suits he believes he might receive is bounded on the left by Xl and bounded on the
    right by Xr; the average, Xa, is precisely the same as Vc(P), his willingness to pay
    for a suit at *P. For a product that is known to be far from ideal, moderate uncertainty 9
    does not affect the value the consumer expects from the product that he expects to
    receive, willingness to pay is the same as willingness to pay for a product at *P, and
    there is no uncertainty discount.
    Working with Figures 2 and 3, we can derive a curve that illustrates the impact of
    uncertainty on the entire range of consumers considering an unfamiliar product that
    they expect will be located within a band of uncertainty centered at *P. For consumers
    whose willingness to pay for a product at *P would have been V, there is a significant
    uncertainty discount, shown by the drop from the upper inverted V-shaped curve to
    the lower inverted U-shaped curve in Figure 4. For customers whose ideal is located
    at or outside the band of uncertainty, uncertainty has no impact on willingness to pay
    for the product at *P.
    Figure 2. The Uncertainty Discount U reduces consumers’ Willingness to Pay for Products
    Where They Have a High Degree of Uncertainty About the Product’s Exact Set of Attributes
    Figure 3. For a Product at *P That Is Far removed from a consumer’s Ideal choice *c,
    Uncertainty Does Not Affect the consumer’s Willingness to Pay for the Product at *P
    24 ErIc K. clEMONS
    This last point is significant because it explains how the uncertainty discount de-
    fended incumbents and their mass-market fat spots. The only reason to introduce a
    new sweet spot offering is to attract customers who are currently unserved by available
    mass-market offerings, who will find that the new offering perfectly matches their
    unmet cravings and longings, and who willingly pay a premium price to get precisely
    what they want. Of course, by definition, new offerings are unfamiliar to most cus-
    tomers and would suffer from a large uncertainty dis count, which would affect only
    and precisely those customers who would otherwise be willing to pay for the product.
    Historically, those mechanisms used to reduce uncertainty, principally promotional
    advertising accompanied by samples or discounts, are inappropriate for small sweet
    spot offerings. 10 Budweiser, Miller, and coors invested so heavily in promotions that
    advertising became the single-largest cost in the production of beer; smaller companies
    could not compete, and industry consolidation raged. By the early 1990s, it appeared
    that these three companies would control the entire beer market in the United States.
    With the rise of informedness, craft brewers do not need to promote or advertise their
    products, the uncertainty discount has been reduced or, in other cases, has simply
    vanished, and the dynamics of brewing have been permanently altered. Similar ef-
    fects are observed in a range of consumer products, where sweet spot offerings in
    juices and other soft drinks, coffees and teas, and power bars and other foods have
    succeeded without advertising.
    The Theory—How Has the reduction in Uncertainty Driven
    change in Strategy?
    h istoricAlly no firm chArgEd its customErs V, the maximum that any of their custom-
    ers would be willing to pay for their product. With few exceptions (such as airlines
    practicing yield manage ment), firms charged all customers the same price, and the
    profit-maximizing price was usually somewhere around one-half the maximum that
    Figure 4. consumers’ Willingness to Pay for a Product at *P Will Be Affected Differently by
    Uncertainty
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 25
    would be paid by anyone. (The proof of this simply involves taking a first derivative,
    as we all remember from a first economics course.)
    So the firm set its profit-maximizing price and rolled out its mass-market fat spot
    offerings. The Industrial revolution produced a market as we experienced for over a
    century; huge firms offer ing mass-market goods and services with minimal variation.
    Huge scale reduced unit costs, and low cost reduced prices, which in turn increased
    scale. consumers had more cars, more clothing, and more food than at any time in
    human history. restrictions were not always as draconian as Henry Ford’s famous
    diktat, “the customer can have the Model T in any color as long as it’s black,” but
    abundance of products and services did not imply a wide selection or consumers’
    freedom of choice. Still, few consumers complained, since abundance without choice
    was a better option than scarcity without choice!
    The scale-leads-to-scale factor was not the only driver reinforcing the power of
    mass-market fat spots. Offerings were centered in fat spots and through familiarity
    and repeated purchase customers developed certainty about these offerings. goods
    and services competed principally through segmentation of the advertising message
    directing the same product to different groups of consumers, rather than through
    segmentation of the product design. 11 Moreover, if companies had tried to develop
    and promote sweet spot offerings, they would have failed; the uncertainty discount
    that their potential new customers would have imposed on their new niche offerings
    would have been lethal to their launch. The world of abundance, limited choice, and
    the power of mass-market offerings pushed through Madison Avenue promotion was
    formed.
    This is illustrated in Figure 5. A new product has been introduced at the asterisk
    (*) shown in the middle of its product attribute space. consumers are equally spread
    along this product attribute space, and consumers’ willingness to pay once again is
    based on the distance between their location and the product’s location at *. Without
    an uncertainty discount, consumers close to the * would have high willingness to
    pay and consumers far from the * would have lower willingness to pay, as depicted
    by the inverted V centered about the *. Unfortunately, for new product launches, the
    uncertainty discount was always large. The maximum reached by the uncertainty
    discount associated with introducing a new product was U, which was large for the
    customers for whom the product would have been ideal; the overall collapse in custom-
    ers’ willingness to pay can be seen from the inverted flattened curve under the higher
    inverted-V-shaped one. The complexity penalty associated with trying to add to the
    product line was M, which was also large. conse quently, there is no profit-maximizing
    price. The profit-maximizing price P that the firm would have charged without the
    complexity penalty is actually lower than the complexity penalty M; indeed, there is
    no potential new customer whose willingness to pay is greater than the incremental
    cost the firm incurs by introducing this new product. In brief, it would have cost the
    firm far more to add new products than the firm could have earned by selling them.
    consumers’ lack of information, and the resulting uncertainty discount and reduction
    in willingness to pay, reduced innovation, new product introduction, consumer choice,
    and the profitability of innovative firms.
    26 ErIc K. clEMONS
    Incipient complexity Management and line Extensions
    By the mid-1970s, companies had learned to manage at least moderate complexity.
    Inventory management software was emerging, even if it lacked the power of today’s
    online tools, and factory scheduling software was developed, even if the plants it man-
    aged lacked numerically controlled machinery coordinated with plantwide local area
    networks. Of course, the uncertainty associated with launches of truly new product
    offerings could still be lethal.
    line extensions were born in part to deal with the uncertainty discount. If the firm
    can manu facture one form of oat ring, it can learn to apply a flavored surface coating
    to make other varie ties. If consumers trust cheerios, then presumably they can quickly
    learn to trust Honey Nut cheerios, along with Berry Burst, Yogurt Burst, Multigrain,
    Fruity, Frosted, and Apple cinna mon cheerios. If the firm knows how to encrust fig
    paste in a cookie dough to make Fig Newtons, then it can make Fat Free Fig New tons,
    Whole grain Fig Newtons, and a host of other fruit Newtons such as Strawberry and
    raspberry Newtons, and if customers trust the Newton brand, then the extended family
    should not suffer from an extreme uncertainty discount. A host of other manufacturers,
    in categories from soft drinks to automobiles and kitchen appliances, rapidly followed
    with their own line extensions.
    We can see this graphically in Figure 6. Firms now introduce numerous line exten-
    sions because the uncertainty discount U is so small, the complexity penalty M is so
    small, and the profit-maximizing price is attractively high. Where once a consumer
    at a particular location *c could contemplate only one purchase from the firm, the
    consumer can now consider more alternatives (Figure 6 shows only two). Where once
    the firm could have extracted the profit-maximizing price only from its customers who
    liked basic cheerios or Fig Newtons, it can now extract this price from a wider range
    of customers, including those who want sweeter cheerios or lower-fat Newtons. 12 The
    reasoning is simple: a consumer at *c, for whom the product on the left represented
    Figure 5. The Uncertainty Discount U reduces consumers’ Willingness to Pay for
    Unfamiliar New Products, While the complexity Penalty M Makes Introducing Them More
    Difficult and Expensive compared to the Firm’s Expenses with a Simpler Product line. The
    Profit-Maximizing Price P That the Firm can charge, given the High-Uncertainty Discount,
    Is less Than the complexity Penalty.
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 27
    a significant compromise, is now delighted with the product on the right. In fact, the
    firm can now introduce an array of related products, each separated from its neighbor
    by the small gap between the asterisks in Figure 6. The gap between product offerings
    is small precisely because they are line extensions; the separations among Pepsi, Diet
    Pepsi, Pepsi lime, and Diet Pepsi lime would not be large. Importantly, since they
    are extensions of a long-standing and familiar product line, the uncertainty discount
    associated with any one of them is quite small, which is why U is small, and we have
    explained above why the complexity penalty M is small. Finally, since extensions mean
    that the firm can appeal to more consumers who are not compromising, the firm can
    charge its profit-maximizing price P for a wider range of consumers.
    Full complexity Management and Sweet Spot Marketing
    Sweet spot marketing and high margins are replacing fat spot marketing and scale in
    some industries, especially in grocery retailing, where sweet spots account for almost
    all of a store’s profits. The power of addition, taking high-margin profits from one sweet
    spot after another, has exceeded the power of multiplication and of taking profits from
    only one large low-margin fat spot. Firms can pursue resonance marketing strategies,
    enabled by customer informedness. Firms have learned to manage complexity in pro-
    duction, distribution, sales, and marketing [20]. And firms do pursue these strategies,
    allowing them to earn high margins by providing whatever the customer wants.
    We can see the power of sweet spot resonance marketing graphically in Figure 7.
    Firms now introduce numerous innovative products, addressing any and all unserved
    and underserved market segments, because the uncertainty discount U is so small, the
    complexity penalty M is so small, and the profit-maximizing price is attractively high.
    The firm is not restricted to line extensions, to small improvements in its offerings that
    exploit its brands and customers’ famili arity with them; the firm can serve any market
    that it can profitably develop, innovation and creativity are more fully rewarded, and
    the gap between offerings can be arbitrarily large.
    Figure 6. The Uncertainty Discount U Has Almost No Impact on consumers’ Willingness
    to Pay for Familiar line Extensions. The complexity Penalty M Has limited Impact on the
    cost of Introducing Them. It Is Profitable for the Firm to Introduce a Wide Array of line
    Extensions and Sell Them at the Profit-Maximizing Price P.
    28 ErIc K. clEMONS
    In Summary—The New Product Strategies of resonance Marketing
    It is now possible for firms to design and launch new offerings for those customer
    segments most willing to pay for what they want. recent work by Steve Barnett, an
    anthropologist trained in ethnographic observation, provides useful insights on exactly
    how firms can determine what consumers want, need, and crave, and how firms can
    locate unserved and underserved market segments [6]. 13 Historically, the most demand-
    ing customers, those most willing to pay for what they want, also imposed the greatest
    discounts in the presence of uncertainty, and historically new offerings always suffered
    from uncertainty. Fortunately, with online word-of-mouse infor mation reducing uncer-
    tainty [16, 35], firms’ ability to launch new premium offerings has never been better.
    Impact of Informedness on the Four Ps
    i nformEdnEss ,  hypErdiffErEntiAtion tEchnologiEs , and resonance marketing collec-
    tively change all of the four Ps of marketing—price, product, promotion, and physical
    distribution [25, 27].
    changing the role of Price
    Informedness and transparency require a change in pricing strategy. This is seen as a
    move from a single fixed profit-maximizing price to a family of dynamic pricing strate-
    gies. This was first seen in pricing based on differences in customers’ cost to serve and
    other aspects of customer desirability. This has been practiced in life insurance and prop-
    erty and casualty insurance since the development of actuarial tables, and has become
    common in credit card issuance. Pricing categories based on customers’ willingness
    to pay for quality, or vertical segmentation, were introduced, such as the versioning of
    rail travel as early as the nineteenth century based on class of service. Next, dynamic
    pricing strategies were developed, such as yield management and congestion pricing.
    Figure 7. The Uncertainty Discount U Now Has Almost No Impact on consumers’
    Willingness to Pay for Products. likewise, the complexity Penalty M Is Now Minimal.
    Firms can Introduce Products to Exploit Any Sweet Spot They Identify, and can Develop
    Products to Meet Unserved and Underserved Market Segments.
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 29
    These were first pioneered by airlines and now extended to hotels, and even to toll roads
    and center city regions. The next round of innovations in pricing were based on trying
    to capture different individual customers’ different willingness to pay, leading to name-
    your-own-price strategies such as Priceline.com. resonance marketing is simply the
    latest means of exploiting improved transparency; in this case, developing mechanisms
    that allow customers to maximize their own delight from their purchases while increas-
    ing companies’ profits. As noted, customers now know more about available offerings
    and are willing to pay more for perfect fit, and companies can now implement highly
    refined differentiation strategies based on horizontal positioning.
    changing the role of Promotion
    The fragmentation of markets into numerous small sweet spots makes promotion
    extremely difficult to perform in a cost-effective fashion. Today, a product that hopes
    to capture 1 or 2 percent of the market cannot justify undirected mailbox stuffing,
    requiring far more analysis and far more targeting than is possible for most new prod-
    uct launches. Organic informedness, informedness that develops through customers’
    experience and their sharing of this experience online, is replacing most attempts at
    creating informedness based on widespread distribution of samples.
    As organic informedness begins to replace traditional advertising, controllable push-
    based corporate communication is replaced by uncontrollable discussion among users,
    and by online communities and user-generated ratings. consumers just know what is
    available, and what they know may not be what manufacturers want them to know!
    Eventually, these three trends may actually kill push-based advertising. Search is
    improving, from key words to counting Web crawls, and from Web crawls to under-
    standing the context and intent of the user’s query. Search drives pull-based product
    selection, and eventually pull replaces push and informedness replaces single-direc-
    tional push-based promotion.
    changing the role of Product
    The increasing complexity of product mix is readily observed and has already been
    noted. This explosion in choice is largely driven by improved customer informedness.
    Informedness enables producers, service providers, and retailers to exploit extreme
    differences in customers’ prefer ences, creating extreme differences in customers’
    willingness to pay. In brief, delight-based product mix is replacing simpler product
    design strategies. This change is based on resonance marketing and hyperdifferentia-
    tion, and thus it is critically tied to informedness and pricing.
    changing the role of Physical Distribution
    Online distribution now allows for almost universal access for some products such
    as information goods; this is the central thesis of Anderson’s [2] view of the long tail
    effect. Traditional placement and physical distribution strategies are being replaced
    30 ErIc K. clEMONS
    by far more complex alternatives with far more complete ranges of offerings. The
    online impact and ability to enable long tail retailing is slightly more complex for
    other product categories, but it still has a large impact on products that are shelf stable,
    easily described, and easily sold online.
    A New Fifth P?
    Perhaps there is a new fifth P, effortlessly informed pursuit of perfection, that drives the
    changes in the first four Ps. This new P describes the fundamental change in consumer
    behavior; it is the driver of the changes in the traditional four Ps, as firms must now
    react to newly empowered consumers.
    The New generic Strategies
    r EsonAncE mArKEting hAs producEd thrEE new generic strategies. The first, and the
    most traditional, is the continuation of mass-market fat spot strategies. Established fat
    spot brands use their market share for cost control, and exploit their brands to protect
    their price. There are indeed still some brands that can accomplish this. For example,
    Tide detergent has defended its position, enhanced by the fact that detergent is not
    a material expense in most households. More importantly, perhaps, the continuation
    of two or even three generations of Tide use is strength ened by the fact that we all
    wish to believe our parents loved us, that they used a detergent that was best for our
    safety and health, and we, of course, owe our children no less. To compete effectively
    with Tide today, it would be necessary to go back in time and unseat it half a century
    ago; unfortunately for incumbents, there are very few products that enjoy this lucky
    combination of defensive factors.
    Sweet spot strategies offer more promise to attackers, and the ability of attackers to
    target sweet spots makes incumbents increasingly vulnerable. But eternal vigilance is
    the price of starting a sweet spot strategy. rocky road was once a resonance marketing
    flavor, an extreme ice cream producing delight in a small segment of customers; it is
    now a commodity offering, and a google Web search for the exact phrase “rocky road
    ice cream” produces over 55,000 pages. Ben & Jerry’s remains actively committed
    to its resonance strategy, and the role of innovation and vigilance is clear. Although it
    had 16 new flavors for 2007 and 43 flavors in total for the year, its flavor graveyard
    lists 287 dearly departed favorites. With informedness affecting both consumer and
    competitor, a well-targeted launch will produce immediate resonance, but if the seg-
    ment is large enough, it will also produce a rapid competitive response.
    The third and final generic strategy attempts to obtain more scale than possible
    with a sweet spot strategy and to reduce the importance of constant vigilance and
    innovation. It does so by creating platform products, products that allow customers
    to combine individual elements to create products that precisely match their own
    strongest preferences. In 1973, Steve Herrell founded Steve’s, an ice cream parlor
    in Somerville, Massachusetts, that allowed customers to combine super premium
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 31
    ice cream with their own choice of “smoosh in” ingredients as customized add-in
    flavorings rather than as toppings, resulting in personalized ice cream flavors (www.
    rocheinternet.com/~herrells/design/?lv=6). cold Stone creamery has replicated the
    strategy and now operates over 1,200 locations. Similar strategies have been tried for
    products as diverse as shampoos and automobiles. In deference to Herrell and the
    decade in which his business strategy evolved, we call this the “roll your own” sweet
    spot product platform strategy.
    But What Do We really Know?
    i s this rEAlly nEw ? Some products have always been aimed at achieving resonance
    through hyperdifferentiation. The millennia-old cosmetics industry has always sought
    to produce what customers wanted in order to achieve resonance, although promo-
    tion and advertising remain quite significant for this category. Some industries have
    always relied on consumer informedness to eliminate the uncertainty discount; robert
    Parker has achieved enormous influence over the American wine market simply by
    becoming the source of trusted information on vintage wines [28], and his granting
    of an unprecedented perfect 100 to the 1982 chateau Mouton contributed to the phe-
    nomenal prices paid for the First growth 1982 Bordeaux. 14 More generally, consumer
    product companies have always understood the importance of informed consumers,
    hence their reliance on advertising, couponing, and sampling. What is significant
    is that informedness is now becoming both nearly universal and largely outside of
    companies’ direct control, making possible resonance strategies in categories where
    expensive promotion was not possible. And the marketing research community has
    observed that information does indeed affect willingness to pay [41], although our
    explanation and our model appear to be unique.
    likewise, marketing has always sought personalization, whether of the advertising
    message [1, 31, 43] or through customization of the product [21, 22, 31, 33]. Surely
    gilmore and Pine [21, 22] understood not only the power of mass customization but
    also the importance of serving smaller and smaller segments, with products better
    suited to their needs. We are not describing a new approach to personalizing a service
    or a message, new ways to customize a product, or new forms of customer relation-
    ship management (crM), although crM has much to contribute [9, 19]. resonance
    marketing is not about mechanisms for allowing firms to circumvent information
    asymmetries and customers’ private information advantage in understanding their
    inherent type or cost to serve, such as signaling or screening mechanisms [26, 29, 36,
    40]. This sort of customer segmentation has long been understood in the information
    economics community [11], and has long been used by firms.
    What we are showing in resonance marketing is why companies can now profitably
    develop offerings to exploit these segments, relying on naturally informed consumers
    to find the offerings ideal for them, and how to do so. This paper focuses solely on the
    first part—why. For a more complete treatment of what resonance marketing is not,
    refer to clemons and gao’s companion paper [10].
    32 ErIc K. clEMONS
    Do we know that this phenomenon is real, and do we know that consumers really
    are willing to pay more, and hence really do buy more, when uncertainty is reduced?
    An early study of music purchases by college students indicated that when dormitories
    were given high-speed Internet connections, the students’ music purchases increased
    [15]. This study was conducted before online downloads were possible, that is, these
    students were not buying songs or cDs for down load, they were listening to music
    and then buying more cDs through catalogs or from online retailers than their class-
    mates who could not sample music online before buying it. Informedness reduces the
    uncertainty discount, and reducing the uncertainty discount greatly increased music
    sales. Similarly, clemons et al.’s [13] study of the beer industry confirms that when
    consumers are shopping to achieve delight and purchasing products that precisely
    match cravings and longings, rather than satisfying their most fundamental needs, then
    new product launches positioned in discrete sweet spots greatly outperform products
    positioned in central fat spots.
    Do consumers always behave this way? Evidence suggests that they do not. There
    are categories of products for which the consumer is not seeking delight or perfect fit
    with cravings and longings, but simply adequate matching of basic needs. Sometimes
    the consumer does trade down, and sometimes being good enough appears to be good
    enough. consumers using discount channels such as hotels.com or Expedia to find the
    lowest possible price for a hotel room in New York or chicago do not expect delight
    but they do want adequacy. Travelers who like you now really are fully equivalent
    to travelers who love you; it is only travelers who hate you who will not accept your
    room even at the lowest possible price [10]. These findings are consistent with the
    predictions of prospect theory [10, 24]. Of course, this is a very unattractive way to
    sell hotel rooms, at the deepest discount, and with the highest commission; being
    barely good enough for your customers really is barely profitable and barely good
    enough as a strategy.
    Is the mass market ever a good strategy? Of course! Movies do not compete on
    price, and the film with the largest number of screenings, and thus the largest possible
    market share, is the most profitable. Moreover, achieving blockbuster status is great
    for advertising tie-ins, future mer chandizing, and future sales of DVDs.
    Putting the Pieces Together
    t hE following ninE guidElinEs rEprEsEnt thE sEquEncE of steps that a firm’s senior
    management team needs to follow in order to safely navigate the transition to a reso-
    nance marketing strategy:
    1. Understand how information has changed consumer preferences and consumer
    behavior. Informedness really does change consumers’ purchasing decisions,
    and it is not possible to understand how corporations should respond without
    first understanding how their customers will act. This is the basis for every-
    thing that follows, and for everything that corporations will need to do in
    order to respond effectively to the changes consumers have created in their
    marketplace.
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 33
    2. Understand how these changes force corporations to modify their product
    offerings. Executives need to understand the impact of differences among
    consumers’ preferences on consumers’ choices and on their willingness to
    pay for goods and services. In par ticular, corporations need to learn to identify
    unserved and underserved market segments; new offerings need to be designed
    based around consumers’ unmet wants and needs, cravings and longings, and
    based around latent preferences that consumers cannot yet express because the
    right offerings are absent from the marketplace. Successful new offerings will
    be designed around gaps in the marketplace, not designed around the firm’s
    current portfolio of offerings, or based on the firm’s current strengths. This is
    fundamental to the firm’s selection of its strategic positioning strategy and to
    its redesign of its portfolio of product and service offerings.
    3. Understand that preferences are dynamic, creating new resonance opportuni-
    ties while foreclosing others. changes in preferences result from events (e.g.,
    when the United States wins a gold medal in hockey or wins the World cup in
    soccer, there will be a significant change in sporting goods purchases), from
    major cultural trends (“green” is now good, global warming is seen as real and
    as bad, and there are new opportunities for the Prius automobile, for bamboo
    fiber clothing, and off-grid green electricity generation), from emerging con-
    sumer preferences (light is good, organic is good, whiskey is bad), and from
    random cultural drift. Unserved and underserved market opportunities arise
    and vanish, and companies need to respond. This explains why products surge
    and then drop out of favor.
    4. Understand how these changes in consumer behavior force firms to modify their
    pricing structures. As we have seen, consumers’ willingness to pay is a func-
    tion of the competition discount, the compromise discount, and the uncertainty
    discount, all of which have changed because of change in consumers’ informed-
    ness. Margins on most commodity offerings have collapsed; supermarkets now
    make all of their ice cream profits in the superpremium end of the category;
    traditional soft drink sales are declining while premium new noncarbonated
    beverages are taking off. Pricing strategy has been transformed, and consumer
    behavior in the presence of informedness has been the principal driver.
    5. Understand how they need to alter production and distribution in order to
    control costs in the presence of greater complexity in the product and service
    portfolio offerings. While needless complexity adds unnecessary expense,
    which can be lethal in price-competitive markets, there will inevitably be far
    more customization and far more offerings with small individual market share.
    There really is a long tail of preferences, of sizes, and hence of offerings in
    all goods and services. There is a range of techniques available for managing
    manufacturing costs; some deal with postponement, combinatorial assembly,
    the use of shared platforms, manufacture to order, and deferred specialization.
    Others deal with more advanced inventory management or better order tracking
    and forecasting. Most importantly, firms need to understand the new balance
    between profitable complexity (products and services that should be offered)
    34 ErIc K. clEMONS
    and unnec essary legacy complexity (products and services that no longer
    have sufficient demand to justify their continuation). The dearly departed
    flavors list of Ben & Jerry’s is but the most obvious example. Managing the
    complexity of the firm’s portfolio of offerings is now critical; understanding
    this allows the firm to assess when a product is profitable, when it produces
    profitable synergies, and when its incremental contribution to portfolio cannot
    be justified.
    6. Understand how they need to alter the firm’s promotion strategies, both for
    existing products and for new offerings. Advertising is losing its impact.
    couponing and sampling still can be used selectively to overcome uncertainty
    discount of targeted consumers, but not as a long-term strategy to push sales
    of products that do not resonate. The future of retailing does not lie in dealing
    with the competition and compromise discounts by paying consumers to buy
    Kraft cheddar, time after time, when they really prefer English farmhouse
    cheddar. The future lies more in offering consumers, especially latent chees-
    ies, a one-time discount to try a single commune roquefort or a well-hardened
    five-year-old gouda for the first time, converting these consumers to repeat
    buyers of their new favorite cheeses without a constant stream of discounts
    to overcome their competition and compromise discounts. This explains why
    some of the fastest-growing consumer products have never been advertised,
    but rather have engaged consumers through carefully executed, cost-effective
    free sampling and events likely to draw their target customers.
    7. Understand the difficulty of maintaining consistently high ratings in community
    content Web sites, when any consumer can be either a brand advocate or a
    brand assassin. corporations need to achieve nearly flawless execution, since
    every piece of lost luggage and every disastrous room experience shows up in a
    report on TripAdvisor and, as we have shown, measurably reduces or destroys
    the firm’s the ability to sell online [13].
    8. Maintaining the image that the firm wants consumers to share probably requires
    the introduction of a new C-level officer, the chief perception officer (cPO). The
    cPO needs to work with marketing to make sure the image is well conceived,
    and needs to work with product development to make sure that the portfolio of
    offerings is consistent with that image. Most importantly, and most difficult, the
    cPO needs to coordinate every aspect of manufacturing, of service delivery,
    indeed every aspect of execution and operational performance, to ensure that
    every customer interaction is consistent with the desired image. A single fail-
    ure to execute can lead to a terrible customer experience, and this experience
    can result in a Web posting that undercuts years of the firm’s investment in its
    image and in managing its customers’ perceptions.
    9. And despite the temptation, do not attempt to sock puppet, impersonate a cus-
    tomer to post your own reviews, or edit the content that is posted on community
    Web sites. There is now ample evidence that this will be outed, and that it will
    be more damaging than allowing the unflattering content to remain. Fix the
    problem, not the review or the reviewer [3, 17].
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 35
    In conclusion
    h ypErdiffErEntiAtion And rEsonAncE mArKEting will transform all aspects of the firm’s
    marketing strategy, including product design, production, distribution, and pricing
    strategies. Increased customer awareness and increased willingness to pay have in-
    creased the role of price when choosing among commodity offerings while allowing
    firms to reduce the role of price in customers’ choice of products and services that are
    unique and truly resonate with those customers.
    Sweet spots have become more attractive as the uncertainty discount associated
    with new offer ings has been reduced, while fat spots have been made less attractive
    by the increase in both the competition discount and the compromise discount. Skill
    in the identification and exploitation of opportunities has become more im portant,
    while scale and the value of historical fat spots have become less so. The profit from
    addition, from summing the profits from numerous high-margin sweet spots, now
    exceeds the value obtained from multiplication, from multiplying the low margins of
    a fat spot by its huge size.
    • Firms have to execute a resonance marketing strategy, because the competition
    discount and the compromise discount have seriously eroded the profit on com-
    moditized me-too offerings.
    • Firms want to execute a resonance marketing strategy, because the reduction of
    the uncertainty discount has boosted the margins and the profits from resonating
    sweet spot offerings.
    • And firms can execute a resonance marketing strategy, because the complexity
    penalty is now manageable.
    Acknowledgments: The author thanks Saleha Asif of McKinsey, Steve Barnett of Bardo consult-
    ing, gil Brodnitz of Accenture, Bill Brunger of continental Airlines, Bill covaleski of Victory
    Brewing, chris Dellarocas of the University of Maryland, gordon gao of the University of
    Maryland, Bin gu of the University of Texas at Austin, lorin Hitt of the University of Penn-
    sylvania’s Wharton School, Panos Markopoulos of McKinsey, Paul Nunes of Accenture, rick
    Spitler of Novantas, Jerry Wind of the Wharton School, and Jim Young of the Intercontinental
    Hotels group. In addition, the author thanks robert Kauffman for his most careful reviewing
    and editing of this paper.
    n otEs
    1. Throughout this paper, the term consumer is used to refer to an individual who buys
    something in a given category. The use of the term customer is reserved to refer to a consumer
    who buys a specific product. Thus I can be a consumer of phone services without being a cus-
    tomer of Verizon if I do not have any Verizon products or services. Where it appears useful to
    do so, we may refer to a consumer, not yet a customer, as a potential customer if he or she is
    contemplating the purchase of a specific product.
    2. The ratebeer.com Top 500 listing can be found online, and the majority of the beers have
    never been advertised; indeed, few of the brewers listed have advertised any of their offerings.
    See www.ratebeer.com/rateBeerBest/table.asp?title=Best+Beers+of+the+United+States+20
    07&file=usa_beer_2007.csv.
    3. The Scoville heat scale for peppers was developed by Wilbur Scoville in 1912. ratings
    can be seen online at http://info-s.com/chart6.html.
    36 ErIc K. clEMONS
    4. For an example of a highly specialized offering, consider automatic watch winders, used
    to wind automatic (self-winding) mechanical wristwatches, for people who own more than one
    and need to keep a second wound while wearing the first. The demand for this product cannot
    be high, and without online sales, it would probably be impossible to find a sufficient number
    of consumers to support a physical store for this product in any geographic location (www.
    orbita.net/pages/10000.htm).
    5. graeters provides an example of the kind of consumer informedness we are discussing
    here. It is a small family-owned business in cincinnati, Ohio. Its ice cream is available only
    locally or online through the Internet, and yet the phrase “graeters ice cream” results in over
    11,000 google hits, including the company’s own entry in Wikipedia (http://en.wikipedia.org/
    wiki/graeters).
    6. While we do not claim that Amazon earns more on the long right tail than on the fat left
    end of its sales distribution curve, we note that for many grocers, the bulk of their profits al-
    ready come from the long tail perimeter of the store rather than the fat middle. Similarly, many
    manufacturers share gM’s experience to some degree, where sweet spot offerings (corvette,
    Hummer) are already more profitable than the bulk of the firm’s more commoditized products.
    The argument behind resonance marketing is that firms will face increasing price pressure on
    their fat spot offerings and will earn increasingly attractive margins on their sweet spots.
    7. Trading up is moving to a product that is better in some readily accepted sense, like moving
    from a Nissan 3.5 liter Murano SUV to the corresponding 4.5 liter Infiniti FX45. Trading down,
    likewise, is readily understood to be moving down market, to a less-expensive product. Trading
    out refers to moving to a product that is not better in any absolute sense, but better suited to
    the preferences of an individual customer. This would correspond to selecting an Infiniti Q45
    instead of a lexus lX 450, or a luna Tea cake bar instead of a clif Maple Nut.
    8. Please see the Appendix for a complete discussion of the assumptions underlying Figures
    1 through 4 and for the derivations of the curves depicted in them.
    9. Moderate uncertainty in this context is a band of uncertainty that is centered around the
    expected location of the available product and that does not extend past the consumer’s actu-
    ally ideal choice.
    10. For example, craft beer represents the fastest-growing segment of the brewing industry,
    but it is still only a small percentage of the market. With less than 4 percent of the beer market
    shared among hundreds of small producers, the cost of advertising would be prohibitive, and
    mass mailing of samples is unlikely to be cost effective since any given beer is unlikely to
    produce the necessary resonance in any given household. Such mass mailings of beer are, of
    course, also illegal.
    11. consider how similar coke and Pepsi really are, even if their ad campaigns are signifi-
    cantly different. This was parodied in The New Yorker’s review of a hypothetical new beverage
    from Pepsi and coke simultaneously [5]. For contrast, consider how different noncarbonated
    alternatives are by comparing a Starbucks Frappuccino to a Naked Pomegranalicious.
    12. line extensions are similar enough that, if the brands were owned by separate companies,
    they would inevitably compete for market share; there would be no equilibrium price. If Nabisco
    owned Honey Nut cheerios and general Mills owned traditional cheerios, each might attempt
    to cut the price slightly, to gain market share at the expense of the other; this, of course, leads
    to a traditional price war. However, with both brands owned by the same firm, the firm can seek
    to maximize profits without worrying about interbrand price wars. In all likelihood, the firm
    would not actually set the price of all new products to that of their previous profit-maximizing
    price; some would be set higher and others would be set lower to maximize total profits. Not
    surprisingly, Honey Nut cheerios are more than 20 percent more expensive per ounce than
    traditional cheerios.
    13. Barnett was perhaps the first anthropologist to apply ethnographic observation and the
    field research techniques of anthropology to the study of consumer behavior. Sometimes his
    studies can be quite simple. customers had reduced their purchase of Snickers and sales de-
    clined. Barnett observed individuals selecting candy bars, watched what they purchased, and
    asked them why they had not bought Snickers. The most frequent answer, “I’m hungry, I need
    food, not a treat,” led both to a new ad campaign stressing how good Snickers were when you
    were hungry and the introduction of a Snickers Marathon power bar. Other studies involved
    reading every automotive review ever published in Consumer Reports to learn what was and
    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 37
    was not deemed important for a particular market segment and to determine what was and was
    not currently available; this work was incorporated into the initial launch of the lexus 400.
    14. By definition, each vintage is unfamiliar to consumers when still in cask and they have
    never had a chance to taste it, and Parker’s ratings determine not only the price of newly released
    bottlings but also of unreleased wine futures.
    15. This may appear to be a strong assumption, even an unjustified assumption, but it is
    the general assumption made by Hotelling [23], Salop [37], and their successors. Indeed, this
    assumption, combined with the assumption of customers’ being uniformly distributed over
    product-attribute space, gives rise to the familiar downward-sloping linear price-quantity
    demand curve.
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    NEW cONSUMEr BEHAVIOr DETErMINES cOrPOrATE STrATEgY 39
    Appendix
    f igurE A1  shows thE willingnEss - to - pAy curvE for a single consumer, contemplating
    a purchase of a suit at the position of the asterisk (*) along the x-axis, the set of all
    possible suits, or suit-description space. Since the suit at * is ideal for this consumer,
    his willingness to pay reaches its maximum V at this location. As is customary (see,
    for example, Hotelling [23] or Salop [37]), the consumer’s willingness to pay for an
    alternative product is shown as decreasing linearly with the distance between that
    product and the consumer’s ideal purchase. For a product located a distance X away
    from *, willingness to pay drops by c, the consumer’s compromise discount, based
    on distance X and a scale factor, unit fit cost, which converts distance from ideal into
    reduction in willingness to pay.
    Figure 2 shows how uncertainty about a product’s actual location also reduces a
    consumer’s willingness to pay for a product. We begin with the same consumer shown
    in Figure 1, once again considering a product located at his or her ideal *P, and once
    again willing to pay his or her maximum, V, for this ideal product. However, now the
    consumer faces a symmetric band of uncertainty around *P. As a result of this, the
    consumer now expects to get some product in the range of uncertainty, rather than his
    or her ideal product with certainty. This specific consumer’s willingness to pay for a
    random selection of any product in the range is simply the average over all products
    in the range. As we can see from Figure 2, 3, and 4, this willingness to pay starts at
    Xl on the left end of the band, rises to V in the center of the band, and declines back
    to Xr on the right. The average on the left side is Xa, which by symmetry is also the
    average on the right side. The consumer’s willingness to pay is the average of the
    willingness to pay on each side, once again simply Xa. The difference between V and
    Xa is the uncertainty discount U.
    Figure 3 shows how uncertainty about a product’s actual location reduces a con-
    sumer’s willingness to pay for a product that was not expected to be ideal. This time
    the consumer’s ideal product would have been located at *c, which is at the far end
    of the consumer’s band of uncertainty. As is customary, we assume that this consumer
    has the same willingness to pay for his or her ideal product, once again V, but that
    the ideal product and thus the entire willingness-to-pay curve has been shifted to the
    right. 15 The product that the consumer expects to receive lies anywhere in the range
    of uncertainty, with willingness to pay bounded by Xl and Xr. The average Xa over
    this range is the same as the consumer’s initial willingness to pay for a product at *P,
    Vc(P), and there is no uncertainty discount.
    Figure 4 shows how uncertainty about a product’s actual location reduces all con-
    sumers’ willingness to pay for the product, irrespective of where their ideal product is
    located. consumers are now assumed to be distributed uniformly along the product-
    space x-axis. For a consumer at *P the uncertainty discount is maximum, as shown
    by the maximum dip in willingness to pay between the inverted V and the inverted U;
    the derivation of this was shown in Figure 2. For consumers whose ideal product is
    located at the edge or outside the band of uncertainty, willingness to pay is not altered;
    the derivation of this was shown in Figure 3. For consumers whose ideal product is
    40 ErIc K. clEMONS
    located within the band of uncertainty, but not at *P or at either end, willingness to
    pay is reduced by some intermediate amount. This can best be explained by referring
    to Figure A1. consider the single customer whose ideal product is shown at *c. This
    customer actually has a band of uncertainty that includes both the possibility of an
    improvement, which results from having the product closer to his or her ideal than *P
    was, as well as the possibility of a worse fit; the green bar shows that portion of the
    range of uncertainty that represents an improvement. This customer’s willingness to
    pay under the range of uncertainty shown can be computed by taking the average of
    the customer’s willingness to pay from Xl to Xr, and is shown at Xa. While uncertainty
    will still produce a reduction in willingness to pay, the resulting willingness to pay will
    be neither as high as that shown in Figure 2 or as low as that shown in Figure 3. The
    set of all such points Xa, showing the willingness to pay derived over all consumer
    locations *c, generates Figure 4.
    Figure A1. The Derivation of reduced Willingness to Pay in the Presence of Uncertainty,
    for a consumer Whose Ideal Product lies Within But Not at the center of the Band of
    Uncertainty
     

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