A. An American philosopher once said, "If a man can ... make a better mousetrap than his neighbor ... the world will make a beaten path to his door." If only marketing innovation was that simple. In today's marketplace, companies that successfully introduce new products are more likely to flourish than those that don't. However, businesses spend billions of dollars making better "mousetraps" only to find consumers rejecting them. Studies show that new products fail at the staggering rate of between 40% and 90%. In the US packaged goods industry, for example, companies introduce 30,000 new products every year, but 70% to 90% of them stay on store shelves for less than 12 months. According to one study, 47% of the start-up companies that pioneered new products later went out of business altogether.
B. Experts and novices alike tend to dismiss unsuccessful innovations as bad ideas that were destined to fail. But surely that's too simple an explanation. If these innovations were so misguided, why wasn't it obvious from the outset? Why don't consumers buy innovative products with distinct advantages over existing ones? To understand why new products fail we must delve into the psychology of behavior change.
C. Companies have long assumed that they have only to develop innovations that are objectively superior to existing products, and consumers will have sufficient incentive to purchase them. In the 1960s, communications scholar Everett Rogers called the concept "relative advantage" and identified it as the most critical driver of new-product adoption. Although compelling, the theory has one major flaw: it fails to capture the psychological biases that affect decision-making. In 2002, psychologist Daniel Kahneman won the Nobel Prize in economics for his research into the reasons why individuals deviate from rational economic behavior. One of the cornerstones of that research, developed with psychologist Amos Tversky, is how individuals value choices in the marketplace. Kahneman and Tversky showed that our responses to the alternatives before us have four distinct characteristics.
D. First, people evaluate the attractiveness of an alternative based not on its objective or actual value, but on its subjective or perceived value. Second, consumers evaluate new products relative to the products they already own. Third, people view any improvements relative to this reference point and treat all shortcomings as losses. Fourth, and most important, losses have a far greater impact on people than similarly sized gains, a phenomenon that Kahneman and Tversky called "loss aversion". Loss aversion leads people to value products they already possess more than those that they don't. In other words, our desire to keep what we have is far greater than our desire to gain something new.
E. In a 1990 paper, behavioral economist Richard Thaler and his colleagues described a series of experiments they conducted to quantify this phenomenon. In one experiment, they gave coffee mugs to a group of people, the "Sellers", and asked at what price point, from $0.25 to $9.25, they would be willing to part with those mugs. The researchers then asked another group, the "Choosers", to whom they didn't give coffee mugs, to indicate whether they would choose the money or the mug at each price point. In objective terms, all the Sellers and the Choosers were in the same situation: they were choosing between a mug and a sum of money. In one trial the Sellers priced the mug at $7.12, on average, but the Choosers were willing to pay only $3.12. In another trial, the Sellers and the Choosers valued the mug at $7 and $3.50, respectively. Overall, the Sellers always demanded at least twice as much to give up the mugs as the Choosers would pay to obtain them.
F. In a 1989 paper, economist Jack Knetsch helped to explain why people tend to stick with what they have even if a better alternative exists, by providing a compelling demonstration of what is known as the "status quo bias". Knetsch asked one group of students to choose between an attractive coffee mug and a bar of Swiss chocolate. He gave a second group the coffee mugs but later allowed each student to exchange their mugs for a chocolate bar. Finally, Knetsch gave chocolate bars to a third group then later allowed them to exchange their bars for a mug. Of the students initially given a choice, 56% chose the mug and 44% chose the chocolate bar, indicating a near even split in preferences between the two products. Logically, therefore, about half of the students to whom Knetsch gave the coffee mug should have traded for the chocolate bar and vice versa. However, in reality, only 11% of the students with mugs and 10% of those with chocolate bars wanted to exchange their products. To approximately 90% of the students, giving up what they already had seemed like a painful loss and reduced their desire to trade.
G. Interestingly, most people seem oblivious to the existence of the behaviors implicit in these biases. In study after study, when researchers presented people with evidence that they had irrationally overvalued what they had, they were shocked, skeptical and more than a little defensive. These behavioral tendencies are universal, but awareness of them is not.
H. In a perfect world, companies would know that consumers irrationally overvalue incumbent products and would take that bias into account when launching innovations. But developers are also biased - in favor of new products. Having worked on a new product for years, developers operate in a world where their innovation is the reference point. They're convinced that the product works and they are keenly aware of the shortcomings of existing alternatives. Companies call those developers "product champions" or "believers", suggesting that they have embraced a world the rest of us haven't yet.