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Beauty Is in the Eye of the Shareholder

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.


Bottom Line: A new study finds that the design of new products can help move a company’s stock — especially if those products appear to be very useful.

Raymond Loewy, the industrial designer who came up with the iconic Coca-Cola bottle shape, had a simple maxim: “Good design keeps the user happy, the manufacturer in the black, and the aesthete unoffended.” Although a new product’s basic appearance has long been touted as an overlooked source of competitive advantage and a key to company performance, only a few studies have tried to prove the point empirically. And what little research has been done has tended to rely on purely accounting-based or subjective performance metrics.

However, a new study takes a more nuanced view by examining (1) how the stock market reacts to the unveiling of a new product; and (2) whether shareholders gain value from the ensuing moves in a firm’s stock price. It turns out that firms can increase their odds of launching a successful new product by not only making it look good, but making it look useful. And although many firms invest heavily in an attempt to make their products stand out from the crowd, the authors found that striving for a simple or “classic” look generally seems to be the better option.

The authors examined more than 80 product unveilings over a recent eight-year period from the automotive and consumer electronics categories, including digital cameras, mobile phones, and home entertainment systems. In these two sectors, product unveilings tend to occur at trade shows or conventions and attract intense media coverage; they therefore constitute important milestones for a firm.

Using companies’ press releases, the authors identified the dates of product unveilings. They then combined several databases and analyzed firms’ abnormal stock returns — that is, the fluctuation in stock price surrounding the announcement of new information that deviates from general market trends. These unexpected shifts in stock prices indicate how investors think a new product will either positively or negatively affect a company’s future cash flow. What’s more, market-based measures are available for all large, publicly traded firms, are reported objectively, and are much less likely to be tainted by managers’ efforts to fudge their accounting numbers.

Additionally, to gauge consumer response to a product’s design, the authors recruited people who were shopping in car dealerships or consumer electronics stores. At a later date, these consumers were asked to assess each offering’s aesthetic, ergonomic, and symbolic appeal; describe their familiarity with the brand; and offer opinions about the product’s functional design.

Whereas aesthetic value encompasses the pleasure consumers derive from their sensory perceptions of a product, ergonomic appeal refers to the logic of a product’s operation and how well its utilitarian aspects stand out. Symbolic worth, meanwhile, describes the degree to which consumers believe the product’s appearance expresses their self-image — the way a person’s identity is reinforced by driving a sports car or a hybrid vehicle, for example.

The authors showed participants the same pictures of all the products in the sample. The images were designed to display all parts of the products that would enable consumers to assess the three different design aspects. The pictures were accompanied by the brand’s label and a standardized description of the product’s crucial features.

Merging the data on investor response and consumer opinion, the authors found powerful evidence of product design’s potential to create value for shareholders. But not all design dimensions had the same consequences. For example, a product’s ergonomic appeal had the most significant positive effect on a firm’s abnormal returns following an unveiling, regardless of the product’s actual functional advantage over competitors’ offerings. The stock market, apparently, prefers utilitarianism over eye-catching bells and whistles.

The stock market, apparently, prefers utilitarianism over eye-catching bells and whistles.

And that’s surprising, the authors note, because aesthetic value is generally the most talked-about aspect of design. But aesthetic appeal drives up a firm’s stock returns abnormally only if the new product also appears to be highly functional — implying that the real value of aesthetics kicks in only when consumers also judge a product to be a practical, efficient item. Putting too much emphasis on aesthetic differentiation could be counterproductive, the authors warn.

In another finding that runs contrary to conventional wisdom, the authors found that symbolic appeal had a decidedly negative impact on stock market responses. Some have argued that aesthetics and ergonomics represent “universally good” features, whereas the value of symbolism may be so subjective as to vary greatly from person to person. The idiosyncratic nature of symbolism may work well in niche or high-end categories, but could lack mainstream appeal, the authors posit, leading investors to worry about sluggish sales on the mass market.

Indeed, products such as plasma televisions or smartphones that looked simple and straightforward got the highest marks for ergonomics, and cars with a classic shape received the highest aesthetic ratings. Vehicles whose design deviated sharply from the norm obtained the lowest grades, presumably because consumers harbored doubts about how a “wacky” look might detract from the cars’ essential drivability and safety.

By considering which aspects of design are responsible for moving the needle on shareholder value, managers can more effectively allocate resources and funding to aesthetic, ergonomic, or symbolic features — depending on the context of the product and its target audience.

Source:In the Eye of the Beholder? The Effect of Product Appearance on Shareholder Value,” by Torsten Bornemann (University of Stuttgart), Lisa Schöler (Goethe University Frankfurt), and Christian Homburg (University of Mannheim), Journal of Product Innovation Management, Sept. 2015, vol. 32, no. 5


Beauty Is in the Eye of the Shareholder