Minjae Kim, Postdoctoral Fellow, Kellogg School of Management at Northwestern University

A challenge to entrepreneurial growth is that “breaking out” to new market segments can elicit suspicion that startups are thereby abandoning their original customers. Yet some startups are able to expand to new market segments without suspicions of betrayal. I propose that the difference lies in the startup’s ability to evoke a plausible “commitment reassurance” inference whereby expansion appears necessary as a way of continuing to serve the original customers. In particular, insofar as the original market segment lacks the carrying capacity needed for survival, expansion to new customer segments will evoke a commitment reassurance inference and increase the startup’s appeal to original customers. By contrast, when the original market segment has the necessary carrying capacity, expansion will raise suspicion. This theory is tested in two studies. Study 1 shows that expansion of a microbrewery beyond its home state is associated with lower ratings from home-state reviewers when the available market size in the home state is large enough but the same action is associated with higher ratings when the home state’s available market size is small. Study 2, an online experiment on a simulated consumer goods startup, shows that the key driver of the effect is the consumer’s perception of how expansion undermines or augments a startup’s perceived commitment to its original customers.