Do Consumers’ Racial Biases Affect the Bottom Line of Founders Launching New Products?

The authors use experimental methods to survey consumer attitudes towards new products launched by founders when the race of the founder is known. They delve into the source of race-based biases that lead to lowered expectations of new product prices when a founder is black.

What you need to know

Ideas and founders can differ in hundreds of ways, however black founders often struggle to succeed. Using experimental methods, the authors investigate sources of consumer bias associated with the race of a founder when launching new products. They find that consumers expect black founders will accept prices ~20 per cent lower than white founders, which inhibits margins and ultimately profitability of those firms. These biases are driven by two related beliefs: 1) black founders invest less in the product and 2) black founders target a poorer clientele. Predominantly, the biases lead to discounted price expectations when products are novel or when diversity is high in the product category. Providing contrary evidence of either of these race-biased beliefs reduces the amount by which consumers discount expected prices and increases potential profitability.

MORE DETAILS

What did the researchers do?

Peter Younkin and Venkat Kuppuswamy use three experiments in which more than 2,400 people were asked to evaluate one of five crowdfunding projects, but where the race of the founder (white or black) was randomized. This allowed them to compare how moving from a black to a white founder affected evaluations of the same idea or product. Most of the participants were asked what price they would recommend the founder set; the authors then compared those recommendations. In each experiment one variable was changed to try and understand not just what was happening, but why the discount was happening.

What did the Researchers find?

The author’s show that most people presume that black founders create lower quality goods aimed for a poorer clientele. However, the authors also found that this doesn’t have to be the case if founders proactively set consumers expectations by, for example, stating how hard they worked or how much they invested. When this happens, the bias disappears resulting in more equitable price recommendations. The authors’ compared their experimental results with what happens on global crowdfunding platform Kickstarter and found a similar pattern: black founders setting lower prices that negatively affects overall performance.

How can you use this research?

Awareness of our biases as consumers is often a good thing. This research reminds us of common biases that places black founders at a disadvantage. For founders or their supporters, the research points to ways they can improve their performance. In particular, bias is rooted in uncertainty, so if founders can reduce a consumer’s uncertainty then they will reduce biases. This can be done by offering explicit and concrete evidence that offsets quality concerns or by working in sectors with more well-established parameters.

Want to know more?

Contact Peter Younkin

Younkin, P., and Kuppuswamy, V. Discounted: The effect of founder race on the price of new products. Journal of Business Venturing 34, no. 2 (2019): 389-412.