Why do some products and technologies take off while others don’t? Why did iPhones become such a rage overnight, while some much hyped (and technologically sound) releases, such as Sony’s Blu-Ray discs, bombed in the market? The diffusion of innovation, or the likelihood and speed at which innovations and technologies spread, is a tricky science. There are many factors that determine innovation adoption, and the consequent success and failure of a product or technology.
Eitan Muller, Professor of Marketing at the New York University Stern School of Business and Chaired Professor of Hi-Tech Marketing at the Tel Aviv University Recanati School of Business, has been studying innovation diffusion for more than three decades now. During a recent visit to Beijing, Muller sat down with CKGSB Knowledge and talked about what it takes for an innovation to spread, the role of consumers, and the lifecycle of innovation.
Q. The early theories on diffusion of innovation focused primarily on the role of communication in new product adoption. In what ways are your ideas of innovation diffusion different?
A. They are similar in ways. One of them is the importance of social networks. If you look at the innovation diffusion literature since 1970s, the emphasis has been on word of mouth, communication, imitation, and what we call the “contagion effect”. People infect other people with new ideas or firms infect other firms with new ideas and innovations. That is the major driver of new product growth, of new innovation growth.
One of the things that we have managed to find out is the fact that innovation growth is slow. When somebody comes to you with a new product or a new innovation and that entrepreneur says it will capture 50% of the market in two years, that never happens. Usually when you think about very important innovations, say, CD players, MP3 players, if you think about the first market or one of the trials, either in North America, Europe or Southeast Asia, it takes [something] like 10 years to take 50% of the market.
It is slow because it’s been driven by word of mouth, or imitation we generally call “social influence”. It takes time if you think about the movement of the idea or the word of mouth between those who have the innovation and those who don’t.
That’s what we’ve been doing in the last 20 years. We were trying to figure out two things. One, how fast the process is and what determines the rate of growth. The newer work is on social networks. In the previous literature, we haven’t made an assumption on the way the market is determined. You don’t know what the network structure is. Now we have some inferences or proxies as to what the social network is. If you think about social networks, there is really only a proxy of the real network that lies beneath that. There are some ways to find out what the real network is and you can think about your acquaintances on Facebook or RenRen or you can think about your telephone contacts in all sorts of social context. That has a lot of effect on the growth of new products. So that’s one of the new studies on the rate of growth, and how the social network determines the way of growth and innovations.
Q. You say it takes 10 years for innovation to spread. It seems a little hard to believe that because we are living in a more globalized world. Information flows more freely than before. Social media allows a lot of diffusion of ideas. So why does it take so long?
A. Partly because adopting innovation is too risky. You don’t know whether the innovation will catch on. If you think about compact CDs, not the regular CDs but the small ones by Sony, they never got off the ground. And you don’t know that ahead of time. Now in retrospect we know it failed because there was a new kid on the block called the MP3 player and it killed all the old technology. There’s always a risk inherent in the technology. It’s not the brand itself.
When you buy one laptop now, there is really no risk to speak of. You buy one of the major brands and you know it’s going to work.. There is no risk involved in the brand, unless you buy a no-brand or a brand you’ve never heard of. The risk is not there because the technology is mature.
But if you buy a new technology, you don’t know whether it is going to succeed, for example the Blu Ray. You didn’t know at that time which technology is going to dominate, which is going to be the industry standard, so people waited. You wait, and therefore it takes time for the product to succeed.
Again, I’m talking on the industry level. Within the industry, some brands will grow faster than others. That’s fine, and then they might take a few years, less than 10 years to reach dominance in the market. But that’s not what we are talking about. It’s not about the brand’s market share. It’s out of the total market potential, how fast are you going to reach 50%? It’s not the market share of a specific brand, but the rate of growth of the market.
Q. Traditionally innovation theorists have distinguished between the different kinds of people who will adopt an innovation and those who won’t. There are categories like ’innovators’, ‘early adopters’, ‘early majority’, etc. Is there a need to rethink these categories now?
Yes, there is. The more modern way of looking at this is to divide the market into ‘early’ and ‘main’. The early market in the old categories was either innovators or early adopters; and the main market is usually divided into two kinds: early maturity and late maturity. There is also the lag of those who come behind but we are not very interested in terms of our marketing efforts. We love them—they buy the product—but we don’t aim our marketing efforts at them. So the main question is between the early market and the main market. There are major differences between them.
The early market is more willing to take risks. They are usually wealthier. If you think again about the risks, it’s not a major risk, but [is] if you are spending a couple of hundred dollars on innovation. You have to have the money in order to risk that $200 or $300, or, if you think about the Google Glass, $1,500. Maybe the price will go down to $1,000 but it is still $1,000. They are willing to adopt the product [even if it] is not perfect. If you think of Google Glass, it’s certainly not perfect but still, people adopted it.
The risk of adopting a new innovation [is not only financial], and part of it is just the innovation failure.
So, those are the early adopters. They will adopt the early market in spite of the inherited risks of early innovation. The main market is not that forgiving. The main market wants the perfect product. So the early market might still be interested in how the product does in the technology itself. The main market is interested only in the functionality. If it functions well, they will buy it. If not, they will not. So, yes, you can try to do what Google does with Google Glass—bringing an imperfect product into the market. That will work for the early market, but that will not work for the main market, the majority.Q. To what extent is the ‘main market’ consumer impacted by the ‘early market’ consumer?
They are. There might be a partial break in communication if the early market still talks technology not functionality, then there is an issue because they talk about the RAMs and ROMs and that is not of interest to the ‘main market’. If they start talking about functionality, then it is. It’s not the fact that they are not talking to each other but the fact that they are talking different language. But if they stop talking about how instead of what it does for you, then yes, they are still being influenced by word of mouth from the ‘early market’.
That would really drive the growth. If you think about the main market, they want someone to tell them that product works. They don’t want inherent risks. They want to minimize the risk. And then the price, whether it is $150 or $200, that wouldn’t matter. What matters is the fact that it works well and the value proposition is there in terms of the price and the performance.Q. Let’s take a recent example, maybe an Apple product. Using your model, can you explain why it took off and how?
I think Apple products, especially the previous ones were a great success because they figured out what people want, why they want [it], why they are unhappy about the previous product and build up a product. For that it is very difficult to do a market research. People don’t know how to verbalize what they are missing in the product. That’s what they know. They have an old phone, a flip phone, and they’ve never thought that they would have emails on their phone because they are too small, and that’s what they are accustomed to. That’s what they see. They don’t think about the larger screen. They cannot verbalize it. They cannot know what it is. So they figured out what people really want without doing a lot of marketing research and they went ahead. If you read some of the literature at the time when they first thought about the product without any keys, they will take it back. How can you have a product without keys, right? A phone must have keys. I think that was a great part of the success. They started a category of iPads, smartphones, or iPhones. You don’t see it that often.
If you think about it, it’s really basic marketing. Good marketing in the sense of finding what people want and designing the product for them. It takes guts for the early adopters to adopt that. They don’t know what an iPhone is. You’ve seen it. It looks odd, with a large screen, no buttons and no keys. What do you do with it? So it appears to the early market and then very quickly to the main market. That’s one product that took off very quickly but still we are not at 50% of market penetration. If you think about the potential, it’s much less than 50%. Most of the world is still using old dumb phones because they are cheap and do the work. You can talk, you can send an SMS. One of the misleading things is that when we look around us, we see a lot of people using smartphones. That’s not the world. That’s the world that we know.Q. What’s your prognosis for Apple? Will the iPhone go along the curve as you say it should?
That’s hard to tell. The industry as a whole, if you think about the smartphones, that’s going to increase. People like the functionality. The fact that you can send an SMS more quickly, more comfortably than using an old phone, or read your emails on the phone. So that is going to grow.
What you asked is about a specific brand. That’s hard to tell partly because Samsung is a great company and in a sense, it’s taking over. It’s not clear who’s going to win the war or if there is going to be a winner. The market might break it out and there will be some leaders, some followers. It’s very much possible that Apple will not be a leader any more. But still, it’s a successful company and they started the industry of smartphones. So back to your question, smartphones will keep on growing and are fantastic products. In them, the brand’s [growth], it’s hard to tell.Q. The life cycle of innovations seems to be coming down because of the advancement of technology. Things come and create a revolution for a short time and then they just go away. Is that impacting this whole idea of innovation diffusion in any way? If you go back 15 years, a Nokia would take much longer to evolve than an iPhone today.
Yes. One of the reasons is that a $25 Nokia basic phone will last for five years without any problem. It’s simply a dumb phone. It doesn’t have a computer inside. iPhone on the other hand, or a Samsung, it’s a small computer. After one and a half year you will feel it’s slow, and you replace it within a couple of years. A Nokia is not slow because it’s a dumb phone. It doesn’t decay as fast as smartphone and therefore, it can keep going on for five years without any glitch.
In general, when we look at innovation of successive generations of the same technology, we don’t find acceleration. It’s surprising. When you look at portable music devices–the original tape, small tape, Walkman, Discman, and then the MP3 player which Sony completely failed in—you don’t find acceleration between those successive generations although it was decades between one and the next. It’s surprising because we are used to think that there is acceleration in everything we see. Life is faster and the acceleration is faster.
What we see in acceleration is, first of all, before and after World War II, there is a major difference. We see differences in technologies which require lots of infrastructure. So if you look at electricity, telephones, old fixed line telephones, they required infrastructure and that’s why it’s been very slow to begin with. When you think about MP3 players, [they] require infrastructure in the sense of having enough songs and media to go around, but that’s basically it. Once technology improves, it diffuses the infrastructure. That’s not the major problem, but still, you see that they diffuse at about the same rate.Q. What are the implications of your research for companies?
Two things. One, be patient, because new innovation takes time. They can try to make it faster but basically a new innovation is a slow process. They have to be patient at the fledgling time. It doesn’t say that it’s not going to catch on. It just says that it’s a painful beginning. That’s it. Once it passes the stage, it might fly.
The second one is that we can give dollar value to the innovation. We can find out what the likely growth of a new innovation is, and we can attach lifetime value to any individual that adopts the product. Therefore, discounting everything to the present time can [give us] a valuation of the new technology. That has a lot of implication, R&D for example. Do I spend more on R&D? Well, let’s calculate the expected value of that innovation and find out whether it is worthwhile to spend another dollar on R&D. Those are quantifiable quantities. We can quantify the dollar value of innovation. And I think that’s one of the major issues that many managers face. They have to find out whether they should to put more money into the R&D or stop it. That’s a major decision and that depends on expected value of that innovation which we can quantify.
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[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]