Firms in business markets are increasingly keen to leverage their customers’ market knowledge. Influential business-to-business (B2B) customers are being involved in providing input to a new product development and design (Bonner and Walker Jr. 2004; Prahalad and Ramaswamy 2000; Sethi, Smith and Park 2001). Boeing involved eleven airlines operators in designing the 777 (Graeber, 1999), which is ranking as one of Boeing’s best-selling models. This study examines whether a B2B firm should involve all or part of its influential customers, both existing and potential, in providing input into the co-design of a new product.
We consider the stylized situation of B2B firm that has two key influential customers. Each influential customer has access to some unique and proprietary piece of information about a different key demand-enhancing design feature. When involved into the product design, an influential customer shares his unique market knowledge with the B2B firm. Both influential customers are assumed to have “complementary” market knowledge. The more influential customers the B2B firm involves, the more market knowledge it accesses and integrates into the product design, the better the product market performance would be and the higher the base demand it would generate.
When the B2B firm involves both of its influential customers, it develops the best possible product with the highest possible base demand, pushing the wholesale price upward. Each influential customer would be able, however, to infer the information of the other customer through the B2B firm’s wholesale price. This gives rise to a “full signaling effect: that makes the B2B firm’s demand more price elastic, resulting in a lower equilibrium wholesale price.
When the B2B firm involves only one of its influential customers, it develops a better product - but not the best possible product. As a result, the base demand for the product in this situation is lower than in the previous one, pushing the wholesale price downward. However, in this case, only the non participating customer would be able to infer the information of the other participating customer through the B2B firm’s wholesale price: in this situation, we have a “partial signaling effect” that only affects the non participating customer. As a result, the signaling effect that makes the B2B firm’s demand more price elastic is dampened, pushing the equilibrium wholesale price upward.
Whether the B2B firm is better off by involving one or both of its influential suppliers depends on the relative strength of these two forces and its net effect on its wholesale price: the reduced base demand effect (-) and the dampened signaling effect (+).