OSB professor helps companies optimize business decisions through crowdvoting

One professor at the Suliman S. Olayan School of Business (OSB) at the American University of Beirut is using his expertise in operations management and decision sciences to develop models that help companies effectively use customer feedback in product introduction processes. Victor Araman, associate professor of decision science, specifically looks at the right balance between garnering customer input and market timing.

Companies are always looking for the “crystal ball" that will tell them exactly which new products consumers want, how much they are willing to spend on a novel item, and the best time to capitalize on an opportunity. Launching new products into the marketplace is a complex and risky endeavor that companies must continuously undertake to evolve and grow, but traditional test marketing strategies take time that is in short supply in a fast moving global marketplace.

“It is not infrequent that companies pull new products out from the market," explains Araman, “because they realize - after introduction - that the demand will not be there. A long list of brands such as Apple, Google, HP, and others have faced such situations. These companies obviously would have been much better off with a clearer understanding of the market response before launching these products. But when is enough is enough?"

Araman and René Caldentey of the University of Chicago have developed models to help companies design crowdvoting platforms that can help them reduce the risk of introducing the wrong product. A crowdvoting system allows potential customers to vote on their favorite design and allows companies to assess the market potential of new products before committing the necessary resources needed for launching them. It also offers a natural opportunity to pre-sell an item based on consumer interest. Pre-selling a new product can offer several complimentary benefits to companies. It can create incentives for customers to vote for their preferred choice between several options, help a company discriminate between voters and regular buyers to generate more revenues, and build an “inventory" of pre-orders to hedge the cost and risk of launching the product.

“The objective for companies, especially those that are continuously introducing new products, is to have a process in place from design through introduction that is integrated, consistent and analytically driven. Well-designed crowdvoting platforms can enable companies to do just that," says Araman.

This voting system has the potential of offering a win-win situation for consumers who hope to influence the seller's final assortment, while at the same time these votes and their pace benefit the seller as they provide valuable information to better forecast demand. Crowdvoting can help companies offer an opportunity to crowdfund (some of) the costs of bringing new products into the marketplace, which is a feature that is particularly relevant for small firms and entrepreneurs that have limited access to capital markets (e.g., kickstarter.com).

Araman and Caldentey proposed a stylized mathematical model to study the design of a crowdvoting system. When a seller is contemplating launching a new product and is uncertain about its market potential, they might set up a website where visitors can review the product description and attributes, and if they like it, can vote (click) on the product without any commitment. To stimulate this process, the seller sometimes offers a price discount (or coupon) for voters, valid only if the product is eventually commercialized. As the votes are cast, the seller gains valuable insights into consumer preferences and can update their offerings accordingly.

According to Araman, “the seller's problem can be viewed as one of balancing the trade-off between exploration and exploitation." As he points out, a critical question in the design of the system is how long the crowdvoting phase should last. Companies need to optimize the length of the voting window so they can balance the amount of time for input with the start of sales for their new product.