This paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product. Our focus is to provide usable managerial recommendations on the strategy of response. In particular we show that if products can be represented by their position in a multiattribute space, consumers are heterogeneous and maximize utility, and awareness advertising and distribution can be summarized by response functions, then for the profit maximizing firm:
- it is optimal to decrease awareness advertising,
- it is optimal to decrease the distribution budget unless the new product can be kept out of the market,
- a price increase may be optimal, and
- even under the optimal strategy, profits decrease as a result of the competitive new product.
Furthermore, if the consumer tastes are uniformly distributed across the spectrum
- a price decrease increases defensive profits,
- it is optimal (at the margin) to improve product quality in the direction of the defending product's strength and
- it is optimal (at the margin) to reposition by advertising in the same direction.
In addition we provide practical procedures to estimate (1) the distribution of consumer tastes and (2) the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available. Competitive diagnostics, such as the angle of attack, are introduced to help the defending manager.
This article was originally published in Marketing Science, Volume 2, Issue 4, pages 319–360, in 1983.
