The problem with innovation
Innovation is vital but difficult: Companies need to create new values in order to stay competitive in the market. However, innovations carry also a certain risk to fail. In his guest lecture, Rochester-Bern professor David Arnold explained the problem with innovation from the customer’s point of view and outlined the principles of good and bad marketing of innovations.
How markets work
Markets exist for the benefit of customers. Therefore, the question for companies should rather be “How can we provide our customers more value?” than “How can we make more profit?”. That means that in an open and properly functioning market, it is the customers who get better value over time.
Hence, companies must create new value, or lose business. Simply offering the same product will result in downward pressure on their prices. So new value creation is an imperative, either through creating new ventures, or via innovation within existing organizations.
However, innovation carries a certain risk: approximately 80% of new ventures and new products fail. But why is the success rate so low?
Customers are the problem
A possible reason is customers. The prospect theory by Kahneman and Tversky shows that most customers are biased towards the status quo: Potential gains must outweigh potential losses by two to three times to overcome their ‘loss aversion’. At a market level, this means that innovations are difficult to sell, because customers are reluctant to switch.
The myth of first mover advantage
Another problem is the assumption of the first mover advantage. A study by Tellis and Golder has shown that first mover disadvantage is more common than pioneer advantage because pioneering is costly, and only the “mass market” will provide a return. Going first with a new product can therefore be dangerous because free riders may come in later.
The adoption of innovative products
However, smart marketing can improve the chances of success. David Arnold mentioned four points which should be considered when launching a new product:
Firstly, innovations should be positioned as an incremental rather than a radical change. As mentioned before, customers don’t want things to be changed. Therefore, new products should more likely be communicated as a new version of an old product than as a brand new invention.
Secondly, lead customers should be used to drive new product markets as they are more trusted.
Thirdly, partnerships with owners of relevant existing market assets should be made and fostered. Especially new ventures can profit from established companies and their experience.
Fourthly and lastly, trial versions of new products that offer risk-free sampling should be created. For big products or services this may be difficult to offer, however, partnerships may give an opportunity to promote a new product in a different way.
David Arnold holds adjunct faculty positions at several business schools and works as a consultant with companies around the world. He is also part of the Rochester-Bern faculty and teaches Marketing Management and Strategic Marketing in the Executive MBA program.