Innovation Equity – Assessing and Managing the Monetary Value of New Products and Services - Hardcover

Ofek, Elie; Muller, Eitan; Barak, Libai

Hardcover

ISBN 10: 0226618293 ISBN 13: 9780226618296

Publisher: University of Chicago Press, 2016

Synopsis

From drones to wearable technology to Hyperloop pods that can potentially travel more than seven hundred miles per hour, we're fascinated with new products and technologies that seem to come straight out of science fiction. But, innovations are not only fascinating, they're polarizing, as, all too quickly, skepticism regarding their commercial viability starts to creep in. And while fortunes depend on people's ability to properly assess their prospects for success, no one can really agree on how to do it, especially for truly radical new products and services. In Innovation Equity, Elie Ofek, Eitan Muller, and Barak Libai analyze how a vast array of past innovations performed in the marketplace from their launch to the moment they became everyday products to the phase where consumers moved on to the "next big thing." They identify key patterns in how consumers adopt innovations and integrate these with marketing scholarship on how companies manage their customer base by attracting new customers, keeping current customers satisfied, and preventing customers from switching to competitors' products and services. In doing so, the authors produce concrete models that powerfully predict how the marketplace will respond to innovations, providing a much more authoritative way to estimate their potential monetary value, as well as a framework for making it possible to achieve that value.

About this title

About the Author

Elie Ofek is the T. J. Dermot Dunphy Professor of Business Administration at Harvard Business School. Eitan Muller is professor of marketing at the Leonard N. Stern School of Business at New York University and the Arison School of Business of the Interdisciplinary Center Herzliya in Israel. Barak Libai is professor of marketing at the Arison School of Business at the Interdisciplinary Center Herzliya in Israel.

Excerpt. © Reprinted by permission. All rights reserved.

Innovation Equity

Assessing and Managing the Monetary Value of New Products and Services

By Elie Ofek, Eitan Muller, Barak Libai

The University of Chicago Press

Copyright © 2016 The University of Chicago
All rights reserved.

ISBN: 978-0-226-61829-6

Contents

Introduction, 
CHAPTER 1. The Basic Diffusion Pattern of an Innovation, 
CHAPTER 2. The Whole Is Bigger Than the Sum of Its (Diffusion and Customer Lifetime Value) Parts, 
CHAPTER 3. Don't Just Stand There: Do Something! Growing Innovation Equity through Marketing Actions, 
CHAPTER 4. Foreseeing Bumps and Potholes along the Diffusion Road, 
CHAPTER 5. Jumpstarting Stalled Adoption: Getting the Mainstream to Take the Plunge, 
CHAPTER 6. Survival in the Presence of a Rival: Valuing Innovations at the Brand Level, 
CHAPTER 7. Leaping Ahead to Valuing the Next Generation, 
CHAPTER 8. Innovation Equity Makes the World Go 'Round, 
CHAPTER 9. Making the Framework "Work" for You, 
Appendix: Math and More, 
Notes: Information Sources and Comments, 
References and Recommended Reading, 
Acknowledgments, 
Index, 

CHAPTER 1

The Basic Diffusion Pattern of an Innovation

I wish developing great products was as easy as writing a check. — Steve Jobs

Imagine that you've just gotten back to your office from a long management meeting. The vice president of R&D took center stage, presenting a cool new technology that his scientists and engineers have been working on for the past two years. He informed the group that new products based on the breakthrough technology could be developed in a reasonable time frame — perhaps even a year from now — and asked for a green light and for green dollars to forge ahead with his development plans. The CEO seemed enthusiastic, exclaiming at one point that this may be the answer to the company's prayers. She is ready to "write the check" to fund development, yet being a prudent corporate leader, she has asked you, the vice president of marketing, to assess whether this new technology will succeed in the marketplace and to determine how long it would take to recoup the investment that the vice president of R&D asked for. Not one to shy away from a challenge, and quite impressed with the technology yourself, you promise a quick yet thorough analysis.

Eager to get started on the CEO's forecasting challenge, a few minutes later, you sit down at your desk, take another quick look at the demo video presented at the meeting, and go over your notes. And then it hits you: "If we launch an innovation based on this technology, is there any meaningful way, not just some wild speculation or overly naïve guess, to assess the return on investment (ROI) years down the road?" You're not quite sure where to begin. You might even start to panic a little as your report is due in less than two weeks.

Once you regain your composure, you recognize that you might want to break down the task in front of you into its fundamental components. To evaluate how well the proposed innovation will do in the marketplace — whether it's worth it for the CEO to write the check — it's useful to begin by studying how markets generally react to innovations and after that is understood, examining how your company's innovation might fare among consumers given its particular characteristics.

Innovations and the Marketplace: A Dynamic Relationship

One way to think about the market for an innovation is as the collection of individuals who would consider adopting it at some point in time. This simple definition entails several important notions relevant to constructing an effective commercial forecast for an innovation. First is the issue of who the individuals are that might find the innovation appealing; let's call that the set of potential adopters. Second is the issue of when an individual from the potential set will eventually adopt the innovation. Third is the issue of why an individual from that set would consider adopting it. As we will shortly see, answering these three questions — who, when, why — will create the foundation for constructing a powerful model that a company can use to project how demand for its innovations will likely evolve over time. This will help advance us in our quest to assess the commercial opportunity and expected ROI that an innovation presents.

It is instructive to begin by answering the last question — why a person adopts something new — and understand what causes individuals to bother with an innovation when they could simply stick to whatever it is they were doing before. Many sociologists, psychologists, marketing academics, behavioral economists, and practitioners have studied how individuals think about and react to novel concepts (a new product, a new service, a new social norm, an unfamiliar idea, etc.) and how they decide whether those concepts are worth embracing. In many respects, the findings from numerous studies conducted on the topic point to the fact that it is often more revealing to ask the question in the reverse — that is, "Why would a person not adopt something new?" It turns out that uncovering why people show a lack of interest in certain innovations or deem them unworthy of their time and money is critical to characterizing the manner in which we should expect the demand for an innovation to evolve over time. We examine these "barriers to adoption," as they are often called, and draw upon a classification schema proposed by esteemed innovation scholar Everett M. Rogers. The picture that will emerge from this examination is that of two main routes or forces that can lead to adoption.

Why do I need it? What's the relative advantage? Obviously, if the "new thing" under consideration is not perceived as delivering enough benefit or improvement over existing products and services to justify its cost, then consumers tend to pause, delay purchase, and even dismiss the innovation altogether. Take the Segway — or as it was officially called, the Segway Personal Transporter — as an example. This two-wheeled, self-balancing electric vehicle was introduced with much fanfare in December 2001 on the ABC News program Good Morning America by its inventor, Dean Kamen. Many notable industry pundits, including Steve Jobs and prominent venture capitalists, touted the Segway as a breakthrough that was "bigger than the Internet, and more important than the PC." They predicted that its rapid adoption would force the redesign of cities and make Segway Inc. the fastest company in history to reach $1 billion in sales. Obviously, these predictions did not come true, particularly the ones about how quickly it would be embraced by ordinary consumers. While this innovation is still with us, and its adoption figures are still on the rise (reports indicate that more than one hundred thousand Segways had been sold by the end of 2011, which marked the product's tenth anniversary), it was by no means an "instant success story." Although mainstream consumers marveled over the technology and were intrigued by its antics, very few rushed out to buy one.

What went wrong with the predictions? Given the widespread publicity that the Segway and its inventor enjoyed, including numerous appearances on television and radio and extensive print and online coverage, most consumers had heard about this new means of transportation and had seen video footage of it. So awareness per se does not seem to be the culprit. What is, then? One clue for why the pundits were so off target lies in how the innovation was described to consumers. When introducing the Segway, Kamen declared that it "will be to the car what the car was to the horse and buggy." Kamen, like many others at the time of the launch, seemed to believe that consumers would think of the Segway as a better and more useful means of transportation than the car. On a purely conceptual level, Kamen was right: consumers do tend to evaluate products and services (and just about anything else, for that matter) relative to something they are familiar with, which they can benchmark against. And this is particularly true in situations that involve considerable uncertainty for them, as is undoubtedly the case with most radical innovations. But with the Segway, a direct comparison to the car actually revealed many relative disadvantages for the average consumer: Kamen's Personal Transporter could be mounted by only one person at a time and delivered a top speed of merely twelve miles per hour and a riding range of ten miles between charges. These kinds of specs surely pale in comparison to even the cheapest of compact cars, which typically have room for four or five people, reach speeds of well above sixty miles per hour, deliver a range of several hundreds of miles between refueling stops, and in most cases have cargo space. Therefore, it was not clear to average consumers how they could possibly consider replacing their cars with the Segway. And with no compelling reason to add the Segway to the existing set of vehicles they owned (the national US average being about two vehicles per household), $5,000 seemed a bit too much to spend on a "wonder of technology" that didn't fulfill a perceived distinct need.

Contrast the Segway experience to that of Apple's iPad (as the harbinger of the tablet category). Three million devices were sold just eighty days after the official release date (in April 2010) and an additional 4.2 million units sold in the following quarter, far exceeding the predictions of many industry analysts. While prelaunch predictions were positive in disposition, most experts in this instance grossly underestimated the iPad's sales trajectory by well over 100 percent! As with the Segway, there was much fanfare in advance of the iPad's launch, with Steve Jobs declaring at the first unveiling that "this is a truly magical product." Hence most people knew about the iPad, were informed about its features, and had seen it on television and online. But in stark contrast to the Segway, many consumers were in a frenzy to get their hands on one, with long lines forming outside Apple stores when it became available.

What was the difference? Of course, the price tag on an iPad was lower than that of a Segway, yet many an electronic product under $1,000 has been launched only to collect dust on retailers' shelves. (Does anyone remember Sony's MiniDisc audio format or Samsung's YP-K5 portable MP3 player that could slide open to function as a boom box? Probably not.) To understand the difference in outcome, we must once again examine how the innovation was perceived by consumers and, specifically, relative to what other products its benefits were compared. While for decades the prospects of tablet devices like the iPad were viewed as "PC substitutes," Apple cleverly positioned its iPad primarily in relation to the iPhone, Apple's hugely popular smartphone device launched three years earlier. From a design standpoint, the iPad bore an unmistakable resemblance to its smartphone counterpart. Furthermore, the TV and print ads that Apple ran for the iPad highlighted the wide availability of applications, or "apps," virtually all of which were already available for the iPhone. The message in the these ads centered on the media and entertainment value proposition behind the device rather than on productivity or functional uses that one might typically associate with, say, a laptop — as Jobs said, it's about a "magical" experience, not a "practical" experience. Apple's intent was picked up by the marketplace as the initial reviews came back suggesting the iPad was "like a bigger iPhone."

All of this facilitated the iPad's rapid uptake in a number of ways. The iPhone had fascinated its users by allowing them to turn their cell phones into multimedia devices on the go: one could surf the web, play games, run a host of cool apps, and engage with social networking platforms anywhere, anytime. Moreover, the touch screen property of the iPhone enthralled consumers, proving to be a highly effective and intuitive user interface (innovation in user friendliness had been a long tradition at Apple). But when at home or sitting at the local Starbucks, the iPhone was somewhat inconvenient: its screen size was small (about 3.5 inches), it had good but not great visual resolution, and its limited ability to process and store data could be a drag. The iPad was positioned to fill that gap: it featured a screen nearly triple the size, enhanced picture resolution (a 9.7-inch display of 1024 · 768 pixels versus the iPhone's 320 · 480 at the time), and more processing power (an all-new 1 GHz chip compared to the iPhone's 600 MHz chip). Thus consumers could easily see how their endearing iPhone experience could become relevant for "off the go" settings with the iPad. In fact, many of the early iPad adopters, those who had lined up in front of stores for hours before they opened on April 10, 2010, were avid iPhone users.

Steve Jobs was rumored to have said, "[The iPad] will be the most important thing I have done," and he even admitted at one point that work on developing it actually started before any serious efforts were devoted to the iPhone. Yet he recognized that the iPad's success depended on setting the right comparison anchor: he realized that positioning the iPad as having advantages relative to the iPhone in certain contexts, and much less so relative to PCs, would likely facilitate market acceptance, but this meant that it was critical for consumers to first have adequate experience with the iPhone. Hence the timing for concluding development and launching each of these innovations was flipped. The significance of this framing strategy was explicitly brought to the fore when Apple launched its next-generation tablet, the iPad 2, in March 2011. Apple's CEO took a direct jab at competitors who, in his opinion, got the reference point for consumers all wrong: "A lot of folks in this tablet market are rushing in and they are thinking of this as the new PC. They're talking about speeds and feeds just like they did with PCs. Every bone in our bodies says this is not the right approach."

Figure 1.1 depicts the total number of iPhone units sold from the device's debut in fall 2007 and until shortly after the launch of the first iPad in spring 2010, each quarter adding the units sold in that quarter to all previous sales. Assuming that the majority of those purchasing an iPhone by Q2 2010 were first-time buyers — that is, they had not yet replaced their devices within this time frame — suggests that there was a base of more than fifty million users who could appreciate the iPad in relation to their iPhones.

What exactly is it? Why is it so complex? Can I try it first? The bottom line from the "Why do I need it?" barrier just discussed is that consumers' decision to adopt or not adopt an innovation is often based on whether they can perceive sufficient benefits from it relative to something they are familiar with and that they will compare it to. Yet a critical prelude to this step is whether they can even understand what the innovation does or how it works when it is presented to them.

Perhaps not surprisingly, the more difficult it is for consumers to understand the technology behind a new product or service and how one actually uses it, the less inclined they are to adopt it. Confusion breeds avoidance in the domain of innovations. In addition, the more opportunities a consumer has to physically "test drive" the innovation by experiencing it firsthand instead of just seeing it on television or on YouTube or reading about it on some tech site, the more he or she can gain an intuitive understanding of its operation and develop a sense of how it is used. These factors, which can greatly affect the willingness to adopt an innovation, have been termed the complexity and trialability of an innovation.

Once again, a comparison between the Segway and the iPad is revealing. In the case of the former, when it was launched, there was no convenient way for consumers to try the vehicle before deciding to purchase it. Segway Inc.'s management seemed to be convinced, perhaps fueled by the lofty prophecies of the notable industry pundits, that this was a mass-market product "out of the box." Consequently, it was initially distributed through Amazon.com. That's right: consumers were expected to purchase it online and had no practical way of trying it first. This was problematic given that for most people, it was not at all obvious how it worked or how easy or hard it would be to operate on a day-to-day basis. The Segway Personal Transporter boasted novel gyroscopic technology and advanced software, but what did all that mean to the lay consumer? How easy is it to maneuver a vehicle designed to react automatically to body posture? Is it safe? It has only two wheels, so why would it not fall over when it stops moving? How does it feel to ride a Segway at twelve miles per hour on the road? How about on the sidewalk? Can it go in reverse? What percentage of the time does it not do what it is supposed to? These were among the many questions consumers had, and it was difficult to get a true sense of the product without physically trying it out.

Moreover, the fact that it was all electric, which in 2001 was a very uncommon way for consumers to fuel their vehicles, further raised questions about convenience. There was a return policy in place, but that was clearly not enough for the vast majority of consumers to entertain spending $5,000. In subsequent years, Segway Inc. corrected many of these complexity and trialability issues, a point we will pick up in chapter 5, but at the outset, these barriers were present in spades.

The iPad was a totally different ball game in this respect. With more than three hundred Apple stores, located mainly in busy metropolitan areas where the bulk of its potential market resides and/or shops, consumers could walk in and play with the device extensively before deciding whether to buy it. Furthermore, because of extensive public familiarity with the iPhone, nothing seemed overly complex about the iPad. Consumers had gotten used to life with touch screens and had a good sense of how to conceptualize and take advantage of the new world of apps — two big draws for the iPad.

(Continues...)

Excerpted from Innovation Equity by Elie Ofek, Eitan Muller, Barak Libai. Copyright © 2016 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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Edition details

• Publisher: University of Chicago Press
• Publication date: 2016
• Language: English
• ISBN 10: 0226618293
• ISBN 13: 9780226618296
• Binding: Hardcover
• Edition number: 1
• Number of pages: 352