The Osborne Effect: Understanding Your Buyers
What is The Osborne Effect?
The Osborne Effect is a social phenomenon that kicks off the following chain reaction:
- A company promotes an upcoming product or offer
- Seeing this promotion, consumers defer their planned purchase in anticipation of the forthcoming product
- Consequently, premature product announcements about new offerings cannibalize sales of an existing offering because consumers are looking forward to a more refined or better product.
Here’s an example:
You start a new job working from home. The new job requires you to print out documents, letters, and invoices for your customers. However, you have an old printer that jams frequently and doesn’t have Wi-Fi, so you have to plug it in with a long cord that stretches across your office. Due to this inconvenience, you start thinking of buying a new printer. Like a normal consumer, you go online to find the latest printers and see which ones you can afford. After some research, you finally find “the one”. You head to the store website to order it, and you see an advertisement for what looks like the same printer. It’s the same brand and says, “coming next month, our newest model printer — Complete with Wi-Fi, bigger ink modules to save you money, and even better resolution than the previous models! And the best part — it costs the same.”
So what are you going to do? A large portion of the customer base will wait a month because most people want the better model, especially if the cost is similar. This is the Osborne Effect in practice.
Where did The Osborne Effect come from?
This social phenomenon, named after Osborne Computer Corporation (OCC), tells the parable of how announcing new products prematurely can work to the detriment of your business. The term was coined in reference to Adam Osborne, founder of OCC, who prematurely announced several next-generation model personal computers (after the release of the first model, the Osbourne 1). The hype from this announcement was such that many customers delayed purchasing an OCC machine in anticipation of the next-gen machines. Osbourne reacted direly by cutting prices of the Osborne 1 in an attempt to stimulate cash flow. Much to the chagrin of OCC, nothing worked, and for several months sales were near non-existent as people were eagerly waiting to buy the next-generation models. These “lost” sales eventually led to OCC’s bankruptcy in 1983. The problem was, OCC still needed cash flow in order to finish building these prototypes that they had preemptively announced.
How does The Osborne Effect work?
This effect works because, as humans, we always want to have the best and latest things. It’s counterintuitive to buy now if we know something better is coming just around the corner; therefore, consumers are more likely to hold off.
How do companies leverage The Osborne Effect?
Companies should only promote new products and offerings when they are prepared to cannibalize sales of the current offering, or just before the launch of a new product. Another way to counter the Osborne Effect is to actively discount or promote the outgoing model because some people like to get deals on outdated stock (though this strategy was ineffective for OCC).
Pre-announcement is done for many reasons: to engage and reassure existing customers that there is an improvement or lower cost, increase investors’ interest in the company’s future and intimidate or throw off competitors. When product announcements are executed well, the impact on sales and cash flow is minimal and can be offset by the new product’s orders or completed sales.
In conclusion
Once a company announces a newer, better product, consumers may be less likely to buy the current product model, which can hurt the sales of your existing product. Product announcements should be done strategically, with an acute understanding of consumer psychology.
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