A summary of all articles discussed and relevant in the course of 1ZM11 - Marketing and Innovation for the master track Innovation Management in Industrial Engineering / Technische Bedrijfskunde given at the Eindhoven University of Technology.
1ZM11 – Marketing & Innovation
Summary of Articles
Written by:
R.F.J.F. Van Doorslaer, 1001804
March 30th, 2023
, Session 1 – Customer Value
The main topic of the 2 articles is customer value. They are conceptual articles.
Session 1 – New Product Adoption
Title: Easy Sellers, Stony Buyers – Understanding the Psychology of
New Product Adoption
Author: John T. Gourville (2006)
Type: Conceptual
In Short
Gourville (2006) discusses that new products are trade-offs, and that providers often overvalue their products.
Moreover, new products that require behavioral change often take long to adopt. The author draws upon
prospect theory (loss aversion).
Summary
New products fail way too often (40-60%). 70-90% of new innovations (radical) don’t stay on the shelf for
longer than 12 months. Almost half of pioneers (first movers) of new product categories later pulled out of
business.
After failing, however, experts and novices alike tend to dismiss unsuccessful innovations as bad ideas that were
destined to fail. This paper discusses the psychology of behavioral change, to understand why new products fail
to live up to a company’s expectations.
New products often require consumers to change their behavior, but for companies, this is a costly change in
behavior because of (1) transaction costs, (2) learning costs and (3) obsolescence costs. These economic costs
are routinely anticipated by companies, but the (4) psychological costs associated with behavioral change are
generally not considered.
Psychological bias: “People irrationally overvalue benefits they currently possess relative to those they don’t.”
This is true for both a consumer to overvalue the advantages of products they own, and for executive to value
the benefits the innovations they developed over incumbent products.
The Psychology of Gains and Losses
In the 1960s, communications scholar Everett Rogers called the concept “relative advantage” and identified it as
the most critical driver of new product adoption. It assumes that companies make unbiased assessments of
innovations and consumers’ likelihood to adopt them, but it has a major flaw in not capturing the psychological
biases that affect decision making.
Gains and Losses
In 2002, psychologist Daniel Kahneman explored why and when individuals deviate from rational economic
behavior. He showed that human beings’ responses to the alternatives before them have 4 distinct
characteristics.
1) People evaluate the attractiveness of an alternative based not on its objective, or actual, value but on its
subjective, or perceived value.
2) Customers evaluate new products or investments relative to a reference point, usually products they
already own or consume
3) People view any improvements relative to this reference point as gains and treat all shortcomings as
losses
4) Losses have a far greater impact on people than similarly sized gains, a phenomenon they call “loss
aversion”
2
,The Endowment Effect
In 1990, behavioral economist Richard Thaler postulated a bias called the “endowment effect,” which states that
consumer value what they own, but may have to give up, much more than they value what they don’t own but
could obtain. People irrationally overvalue goods in their possession over those they don’t have by a factor that
is very close to 3.
Status Quo Bias
In 1989, economist Jack Knetsch provided a compelling demonstration of what economists William Samuelson
and Richard Zeckhauser called the “status quo bias”. Provide a consumer with a new benefit, and she will see it
as a gain; take away a benefit, and she will see it as a loss. But also: reduce a current cost and people will
perceive it as a gain; impose a new cost, and it will be treated as a loss. Most innovative products suffer from a
gain-versus-loss syndrome.
Consumers and behavior change
Consumers view products they own or regularly use as part of their endowment. As a result, they assess
innovations in terms of what they gain and lose relative to those existing products. Interestingly, most people
seem oblivious to the existence of the behaviors implicit in the endowment effect and status quo bias. These
behavioral tendencies are universal, but awareness of them is not.
Building a Behavioral Framework
Gourville built a theoretical framework around the 3 entities that drive the market potential for any innovation:
(1) the new product or technology itself, (2) the consumer who must adopt it, (3) the company that designs
it.
Since consumers overvalue losses, it is not enough for e new product simply to be better. Unless the gains far
outweigh the losses, consumers will not adopt it.
Not only consumers, but also executives are biased – in favor of new products. The innovation they worked on
for a long time has become their reference point. If other (incumbent) products don’t share the same features
they see them as shortcomings, and having the features that an incumbent product already provides don’t seem
essential. Companies call those executives visionaries, product champions or believers. When they adopt the
innovation-as-status-quo view, problems arise: they are prone to the endowment effect just like consumers.
People who know an answer to something assume that others will be able to understand or solve that answer
equally fast, which is irrational. Due to the “curse of knowledge,” developers expect consumers to see the value
in their innovations that they see. Instead of anticipating difficult sells, managers are shocked when sales don’t
materialize.
Figure 1: Prospect Theory (Kahneman)
So, consumers overvalue the existing benefits of an entrenched product by a factor 3, while developers
overvalue the new benefits of their innovation by a factor of 3. The result is a mismatch of 9:1 between what
innovators think consumers desire and what consumers really want.
Balancing Product and Behavior Changes
Companies can do the following things to ensure that consumers will adopt new products:
3
, 1) Ask what kind of change they are demanding of consumers. The bigger the behavior change, the bigger
the resistance from consumers is likely to be.
2) Identify where their innovations fall in the “capturing value from innovations” matrix:
Figure 2: Competition and behavioral change has to be taken into account.
- Easy sells: Most common products (e.g., toothbrush) that require limited changes and adjustments in
behavior, but the benefits to both consumers and companies are limited.
- Sure failures: Companies should avoid developing products that involve limited change and offer few
benefits but require significant behavior change (e.g., DVORAK keyboard).
- Long hauls: Products that create great value but also require significant behavior change. These
products generally has high consumer resistance.
- Smash hits: Innovations that offer great benefits but require minimal behavior change. These are the
best for both short – and long-term success.
Accepting Resistance
Companies can do several things to manage consumer resistance:
- Be patient: a company can simply brace for slow adoption. To be successful, companies must
anticipate a long, drawn-out adoption process and manage it accordingly (“cross the chasm”). If a
company wrongly assumes rapid adoption, it may run out of resources quickly.
- Strive for 10x improvement: a company can make the relative benefits of their innovations so great
that they overcome the consumer’s overweighting potential losses. A product must offer benefits that
are 10x better than existing products.
- Eliminate the old: most companies don’t have the option of eliminating rivals. However, sometimes
regulatory agencies can play a facilitating role.
- Seek out the un-endowed: a company can also seek out consumers who are not yet users of incumbent
products.
Minimizing Resistance
The abovementioned options are for most companies hard to manage, so companies must minimize consumer
resistance by:
- Making behaviorally compatible products: a company can reduce or eliminate the behavior change
that innovations require and thereby create “smash hits”. (e.g., Toyota’s hybrid Prius)
- Find believers: a company can seek out consumers who prize the benefits they could gain form a new
product or only lightly value those they would have to give up. (e.g., targeting environmentally
conscious consumers)
Conclusion
Consumers often fail to buy product that companies expect them to adopt. This is mainly due to the irrational
behavior of people (both consumer and developer), rather than the economic value of physical products.
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