Positioning in Digital Markets: A Demand-Side View

Abstract

This paper proposes that firms’ positioning in digital markets involves offering combinations of core and peripheral product functions that add value to customers. When new entrants face demand uncertainty and seek positions that match customer needs and preferences, they draw on external market feedback, specifically customer evaluations of other products, as an input to their positioning decisions. Using data on Photo & Video mobile applications in the Apple App Store, we theorize and show that two dimensions of external market feedback—overall customer dissatisfaction and customer evaluation heterogeneity—convey distinct information about the demand environment. These cues shape whether entrants position as generalists combining multiple functions or as specialists that concentrate on a core function, as well as the extent to which they differentiate from existing competitive products. Our results show that higher customer dissatisfaction is associated with greater focus on the core function and stronger differentiation in the peripheral functions. On the other hand, higher customer evaluation heterogeneity is associated with reduced focus on the core function and greater imitation in peripheral functions. This study contributes to the emerging literature on firm strategies in digital markets by identifying external market feedback as a key driver of product variety and positioning. It also advances a demand-side view of market entry by demonstrating how entrants use broad market signals to manage demand uncertainty when choosing their initial positions. Funding: This work was supported by the INSEAD [Research & Development Funds] and the Strategic Management Society [SRF Dissertation Research Grant 2018]. Supplemental Material: The online appendices are available at https://doi.org/10.1287/orsc.2022.17112 .