The cost of innovation
Product innovation is big business. In order to capture or defend precious market share, Companies spend billions of dollars on developing and marketing better mousetraps, only to see them miss expectations or fail miserably. According to John Gourville, writing in the Harvard Business Review, up to 90% of new innovations fail in the market place. Specifically, in the US packaged goods industry – an industry one would consider among the best practitioners of product innovation – 70-90% of the 3000 new products launched in 2005 failed within 12 months.
The odds of success and rate of product innovation is unlikely to change in the short term, given the zero sum nature of most markets today. Aside from the negative brand repercussions, there are considerable costs, including: wasted and misallocated investment; increased system complexity; greater likelihood of politicking and; potential management turnover. Why is this happening?
Conventional and unconventional wisdom
Typically, three reasons are given for new product failure. The innovation was never really compelling and was destined to fail in the first place. Secondly, the innovation was compelling but the execution was poor. Finally, the innovation was worthwhile but unforeseen competitive moves squashed it. These assertions appear overly simplistic, particularly in large, successful firms, when one considers the large amount of market research undertaken, the quality of multi-functional expertise around, and the impressive resources and pedigree of many firms.
According to Gourville, the root causes of failure are more fundamental and behavioral, tracing to the perceived product value between buyers and sellers:
- Customers underestimate the benefits of the innovation and over-value the utility of the old product;
- Companies overestimate the need and value of the new innovation
Customer inertia
Management often assumes that since a new product adds more value customers will appreciate and use it. However, behavioral psychologists have demonstrated in many studies that this does not hold up for everyone under scrutiny. People tend to judge alternatives based on perceived and subjective rather than actual value; as a result, customers become skeptical about new product claims. Moreover, most people tend to be impacted more by value losses (known as loss aversion) more than value gains. Loss aversion creates a readier acceptance of the status quo, a disincentive to change and a lack of recognition for the need for new innovation. In general, research indicates people value goods they currently use by a factor of two to three times over new products. Thus, each new product must overcome a strong status quo bias.
Not surprisingly, this bias increases over time to a factor of approximately four. In other words, the more comfortable people are with a product the less likely they will switch. This inertia has important marketing implications. A higher than expected status quo bias will usually require larger and longer term investment in customer acquisition and distribution. Interestingly, when people are confronted with evidence they irrationally over value the status quo, they tend to react defensively and with disbelief, believing they already make rational product decisions.
|
Management exuberance
On the other side of the equation, management often over estimates the real value and potential of their innovations. In particular, managers are likely to: assert that the innovation is compelling; judge current products as inferior to the 'new and improved' product and; believe that a large market exists for the innovation. There are many reasons for managerial exuberance: they lack a deep and holistic understanding of consumer needs as well as the true value of existing substitutes and switching costs; the innovation usually does demonstrate an incremental improvement in functionality; a corporate strategy or culture that "institutionalizes product innovation, creating a powerful imperative for change and; hubris, particularly common with leaders with recent successes. As with customers, these effects are common but rarely apparent to those displaying them. In general, research indicates the above factors cause Companies to over estimate the benefits of their innovations by a factor of three.
Quite a hill to climb
The potential gap between a customer's inertia and a manager's exuberance could be upwards of a nine times mismatch (three times three) between what the buyer wants and what the marketer gives them. Many marketers recognize do recognize the challenges and typically deploy a variety of carrots and sticks to change purchase behavior and usage. However, even with tantalizing and expensive incentives, many customers may never switch to the new innovation, unless forced to.
Realistically, it is unlikely that the Company will ever completely eliminate this perceptual gap. However, some steps could be taken to improve the chances of an innovation succeeding:
Analysis
- Understand what customers value in your new product, their switching costs and how your innovation aligns to their core functional and emotional needs
Product Design
- Focus new product innovation on meaningful and relevant improvements that deliver large increases in value
- Minimize the degree of behavioral change required by customers to purchase and use the product
Marketing
- Target new, unencumbered users with low switching costs
- Identify and enlist key influencers to promote the product
- Communicate in a clear and succinct fashion the nature, value and reason for the change
- Where possible, force compliance by replacing the old with the new
- Be patient but cut your losses with clear failures.
Copyright 2007 Quanta Consulting Inc.
For additional strategic planning insights and a discussion of our relevant client experience, please contact us-
Mitchell Osak
Managing Director
Quanta Consulting Inc.
99 Bideford Ave
Toronto, ON
M3H 1K5
mosak@quantaconsulting.com
www.quantaconsulting.com
|
