Flow Signals: How Patterns over Time Affect the Acceptance of Start-Up Firms

Journal of Marketing

Flow Signals: How Patterns over Time Affect the Acceptance of Start-Up Firms

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Published 9/1/2008

Author: Jade S. DeKinder and Ajay K. Kohli

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Executive Summary
This study examines a common concern of start-ups—how to attract customers. Prior research suggests that customers use market signals, such as a firm’s pricing or advertising intensity at a given point, to make inferences about the firm’s product quality, which in turn influences their purchase decisions. This study proposes that customers use flow signals (i.e., patterns of firm behaviors or states over time) to make inferences about a firm’s current and future product quality. In turn, these quality inferences influence their purchase decisions and, eventually, a start-up’s sales growth. The authors identify three properties of flow signals—displacement, propensity, and consistency—and illustrate them using a start-up’s research-and-development (R&D) spending and voluntary disclosure flows. The study uses panel data from U.S. venture-backed start-ups that went public in 2001–2005. The study’s findings support the proposition that prospective customers pay attention to a start-up’s patterns of behavior over time and do so to a greater extent when a start-up is relatively young. This suggests that it is useful for start-ups, especially younger start-ups, to be aware of the impact of their behavioral patterns over time, especially those that are visible to prospective customers and serve as signals of product quality. Furthermore, customers appear to use all three properties of a start-up’s R&D spending flows to infer product quality. As such, a start-up manager should pay attention to the magnitude of R&D spending increases over time, the general tendency of spending more over time, and the consistency with which spending is increased over time. Regarding voluntary disclosure, customers appear to infer product quality on the basis of a start-up’s magnitude of increases in disclosure over time and the general tendency to increase disclosures over time but not on the basis of the consistency with which disclosures are increased.

Biography
Jade S. DeKinder is Assistant Professor of Marketing at the University of Texas at Austin’s McCombs School of Business. Dr. DeKinder received her bachelor’s degree in Economics with highest honors from Emory University and her PhD in Marketing from Emory University’s Goizueta Business School. She was an American Marketing Association Sheth Foundation Doctorial Consortium Fellow in 2006 and an INFORMS Marketing Science Doctoral Consortium Fellow in 2005 and 2006. Her research interests include market signaling, information asymmetry and uncertainty in buyer–seller relationships, sales force compensation, and econometric modeling.

Ajay K. Kohli is Gary T. and Elizabeth R. Jones Chair in Marketing in the College of Business at Georgia Institute of Technology. He has also taught at the Harvard Business School, the University of Texas at Austin, and Emory University. Dr. Kohli has a bachelor’s degree in Engineering from IIT Kharagpur, a PGDM (MBA) from IIM Calcutta, and a PhD from the University of Pittsburgh. His expertise is in market orientation, sales management, and business-to-business marketing. He has significant work and/or consulting experience in the high-tech, industrial, chemical, consulting, and consumer packaged goods industries. His research has appeared in several journals, including Journal of Marketing, Journal of Marketing Research, Strategic Management Journal, Harvard Business Review, and Sloan Management Review. He is among the 100 most-cited scientists in Economics and Business during 1993–2003 and a recipient of the Alpha Kappa Psi Award, the inaugural Sheth Foundation/Journal of Marketing Award, and the Sheth Award. He is also a recipient of the Jack G. Taylor Teaching Excellence Award at the University of Texas at Austin. His current research focuses on sales management, customer service, market signaling, and brand management.

Journal of Marketing, Volume 72, Number 5, September 2008
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