Why most product innovations fail

If you build a better mousetrap, the world will beat a path to your door. Alas, that is not how it works.

Businesses spend billions of dollars on new products, only to find that buyers reject them at the rate of 40% to 90%, depending on the category. Brand new product categories are similar, with around 50% of the first-movers failing.

Surely, the clear benefits of new innovative products over existing ones would be enough to make them successful.

The problem is that businesses rarely take into account the psychological costs related to behaviour change.

Behavioural economics, where economic theory meets humans' actual behaviour, helps to explain what is happening.

People irrationally overvalue the benefits of the existing products they own relative to the perceived benefits of new ones.

The same psychological bias also means that business leaders are likely to value the benefits of the innovations they have developed much higher than the advantages of the existing products.

This leads to a double-whammy and the results are often disastrous.

Buyers reject new products that would make them better off, while business leaders struggle to understand why new product launches fail.

When buyers face choices, they base their decisions on the relative perceived value, not the actual or economic value, of the new product.

In comparison to the existing products that the buyer already has, improvements are seen as gains and shortcomings as losses. Losses have a much higher relative value than gains. This is known as "loss aversion".

Loss aversion leads people to irrationally overvalue products that they already have, which are part of their "endowment", over those they don't have, by a factor of up to three. This is known as the "endowment effect".

Business leaders also overvalue the benefits of their innovation by a factor of up to three.

The result is a mismatch between buyers and sellers by a factor of up to nine to one, between what innovators think buyers want and what buyers really want. The endowment effect helps to explain many new product failures.

A second critical psychological bias is the status quo effect, which explains why people tend to stick with what they have, even if a better alternative exists.

The source of the status quo bias lies deep within our psyches. We want to protect our egos from damage.

Changing from the status quo means that we take action. When we take action, we take responsibility, thus opening ourselves up to criticism and to regret.

Unsurprisingly, we naturally look for reasons to do nothing.

Staying with the status quo generally represents the safer course because it puts us at less psychological risk and minimises risk aversion.

In business, where doing something tends to be punished much more severely than doing nothing, the status quo holds a powerful attraction.

How can we break through these captive psychological biases when we launch innovative new products?

Studies have shown that around 70% of the difference in the speed at which innovative products reach maturity in the marketplace may be explained by five factors.

Firstly, relative advantage, based on the buyer's perception, is the most important. How much better is the new product?

How similar is the new product to the current one? The closer, the better.

How complex is the new product compared to the existing offering? Greater relative complexity will slow the rate of adoption.

Can the product be seen while in use? If so, adoption will be faster.

Can buyers "try it before buying"? The easier it is to test, the faster the rate of adoption.
All too often, buyers fail to adopt new innovative products or services that companies expect them to adopt.

Until the psychological biases that both buyers and sellers bring to decision making are better understood, new product innovations will continue to fail.

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