Product Innovation and Marketing Strategy

1
Product Innovation and Marketing Strategy

• Adoption of innovations
• Demand Side Perspectives
• Strategic or Firm Side Perspectives
• Product Lifecycle And Some Implications

2
Innovations Demand SideBass Diffusion Model

• Describes the first purchase and diffusion of
  innovative new durables.
• Postulates two distinct types of influences on
  potential consumers
• The intrinsic desire to adopt an innovation the
  innovation effect.
• Consumer characteristics.
• Marketing-mix activities.
• The influence of social interactions (e.g.,
  through word-of-mouth WOM) with consumers who
  have already bought the imitation effect.

3
The Model

• Let the potential market for a new innovation
  such as HDTV be Q and the number of consumers who
  have already bought the product at any time t be
  qt.
• At any time t and for any given consumer in the
  population, let the probability of purchase be
• When qt consumers have already bought the
  product, then (Q - qt) have not yet purchased
  (i.e., this is the untapped market).

4
The Model

• The expected sales at any time t are
• In this i is the coefficient of innovation
• people who are not affected by how many others
  have adopted.
• This effect is highest in the initial periods.
• Captures the fact that early buyers are less
  affected by word-of-mouth (i.e., WOM).
• c/Q measures the coefficient of imitation.
• This effect increases with the number of people
  who have already adopted.
• Later buyers are more influenced by WOM.

5
Sales Patterns
Case 1 Innovation with strong innovation but
weak imitation effect (i c/Q)
3000000
2500000
2000000
1500000
1000000
500000
0
0
Case 2 Innovation with weak innovation but
strong imitation effect (c/Q i)
3000000
2500000
2000000
1500000
1000000
500000
0
0
6
Summary

• The original model fits data quite well at the
  category level in numerous new product markets.
• Given initial sales data it is a good tool to
  estimate
• total market potential
• peak of the innovation
• Although it does not include marketing-mix
  variables, it can be used to provide input to
  marketers
• How to turn a case 1 situation to case 2.
• Ignores the strategic effect of firm competition
  in shaping the product diffusion of innovations.

7
The Product Lifecycle
8
What Happens At Decline?

• Four Strategies The case of Nylon
• Original Uses
• Military parachutes, Ropes, Circular Knit
  conventional hosiery.
• Usage Frequency
• Hosiery Pantyhose as a social necessity.
• Varied Usage
• Fashion Smartness and Variety
• Tinted Hosiery, Patterned Hosiery
• New Uses
• Rugs and tire cords

9
Innovations in Technology Markets

• Windows vs. Apple
• VHS vs. Beta Formats
• QWERTY vs. DVORAK
• Does the superior technology have greater market
  share?
• Why?
• Network Externality

10
Network Externalities and Innovations

• Demand side problems
• Suppose two competing technologies are launched.
• One is established incumbent, there is a new
  technology.
• existing consumers of the old technology
  (installed base)
• new consumers who arrive over time.
• Consumers have to anticipate which technology
  will be widely used by the competitors.
• Leads to problems
• excess inertia (users wait to adopt ).
• excess momentum (consumers rush to an inferior
  technology in the fear of getting stranded).
• How do you solve these problems?

11
Possible Solutions

• Inertia
• communication between users (WOM)
• time bound discounts to early users
• offering converters
• targeting the flow of new users. These users
  exert an externality on the old technology users.
• Excess momentum
• preannouncing the new product to make consumers
  who are just about to buy wait. (Windows 95)
• Introduce earlier regardless of some bugs but
  offer quality upgrades and high quality after
  sales support (Apple Newton, Pentium)

12
Supply-Side Problems

• Two firms with incompatible products but which
  are substitutes
• Lotus vs. Excel.
• Consumer market has network effect.
• Will any firm want to be compatible?
• Which firm will initiate compatibility?
• What kind of situations will make firms cooperate
  to be compatible?
• How should compatibility be achieved?

13
Possible Answers

• Smaller firm often has the greater incentive to
  be compatible.
• The threat of new entry
• More equal market shares implies greater
  cooperation