The article by Clayton M. Christensen states that Disruption occurs when the existing competitive environment of the industry experiences major changes due to a new technological development or business model.
“Disruption” describes a phenomenon in which a smaller company with fewer resources is able to successfully challenge established incumbent businesses. The existing players typically focus on improving their products and services for their most demanding and usually most profitable customers. In doing so they tend to exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive (price or technology) generally begin by successfully targeting these segments that were not served or overlooked by existing players, gaining a share by delivering product/service that better suites their need – frequently at a lower price. Disruptive innovations are possible because they mostly get started in two types of markets that existing players overlook. Low-end footholds exist because incumbents typically try to provide their most profitable and demanding customers with ever-improving products and services, and they give less attention to less-demanding customers. In fact, existing player’s offerings often go beyond the performance requirements/expectations of the latter. As a result of this a door opens for a disrupter focused (at first) on providing these low-end customers with a “good enough” product.
In the case of new-market potential, disrupters create a market where there was no market before. They simply find a way to reach to consumers who are looking for such a product/service and turn non-consumers into consumers. Disrupters also start by attracting and focusing on low-end or unserved consumers and then migrate to the mainstream market. Litmus test to analyze whether a new business idea or model has disruptive potential –
1. Does a growth opportunity exist?
2. Can it attract customers away from the core of the mainstream market?
3. Can the existing player respond?
In order to understand the relation between Pricing and the Psychology of Consumption we took reference from a research paper by John T. Gourville and Dilip Soman which describes initial starting steps in building long-term relationships with customers that is getting them to consume products they’ve already purchased. With increasing competitive pressure and the rising cost of customer acquisition, it is important for long-term profitability that customers actually use the products and services they buy. Consumption also helps establish switching costs.
The research also suggest that consumption is driven not so much by the actual cost paid for product but depends on its perceived cost. Organizations also tend to bundle products/services and use bundle pricing to increase the demand for products and services. This practice does increase short-term demand—but it may also reduce consumption. There is a direct relationship between price and benefits such that an unbundled transaction makes the cost of that items obvious and clearly visible, creating a strong sunk-cost effect and a high likelihood of consumption.
Having studied disruption and the association with consumer behavior, our study makes an attempt to establish the vital link between the disruptive pricing and consumption behavior. The missing link is analyzed by surveying quantitatively behavioral patterns with respect to pricing of telecom services today.