1. science
2. medicine
3. psychology and psychiatry

9- 5 0 4- 0 5 6
REV: APRIL 5, 2004
JOHN T. GOURVILLE
Why Consumers Don’t Buy: The Psychology of
New Product Adoption
“Build a better mousetrap and the world will beat a path to your door,” or so the adage goes. Yet,
the world over, firms have built many a better mousetrap, or so they thought, only to have them
struggle or fail in the marketplace. Consider some recent examples:
•
Webvan spent $1 billion to develop and commercialize its online grocery business,
only to cease operations after failing to attract sufficient customers.
•
The United States Mint has produced 1.3 billion Sacagawea dollar coins, only to
see them languish in people’s homes, banks’ safes, and Federal Reserve vaults.
•
TiVo has spent $500 million to develop and promote its digital video recorder. In
spite of rave reviews from industry experts and early adopters, the company has
sold only 1.3 million recorders through early 2004 and struggles to survive.
A cynic could argue that each of these products was destined to fail—the result of overzealous
developers who fell in love with their creations and failed to deliver adequate value to consumers.
But this explanation may be too simple! The backers of Webvan, and virtually every other online
grocer, were seasoned retailers, business executives, and investment bankers. And who better to
develop and launch a new unit of currency than the United States Mint? Yet, in both cases,
consumers “stayed away in droves.” And while the TiVo story has yet to play out, few industry
insiders foresaw the struggle the company has faced to gain traction in the marketplace.
A key reason behind the failure of these, and many other, innovative new products may go
beyond an objective cost-benefit tradeoff. Indeed, consumers often reject new products that offer
significant improvements over existing products. These failures stem, at least in part, from a
fundamental consumer bias—the systematic tendency to irrationally overvalue the benefits of an
entrenched alternative and undervalue the benefits of a new alternative.
Often by necessity, innovative new products force consumers to change the way they do things.
Webvan, dollar coins, and TiVo, change how we shop for groceries, how we carry cash, and how we
watch television. And these changes represent more than just economic switching costs.1 If they
1
Some may argue that the factors presented in this note simply represent another type of switching cost. If one insists on
this interpretation, however, I would argue that the “psychology of gains and losses” represents a switching cost that is
powerful, pervasive, poorly understood, and not well recognized in the managerial literature.
________________________________________________________________________________________________________________
Professor John T. Gourville prepared this note as the basis for class discussion.
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Why Consumers Don't Buy: The Psychology of New Product Adoption
have any chance at success, these new products must offer “gains”—i.e., new benefits to be obtained
and/or existing costs to be avoided. But, they almost always also involve “losses”—i.e., existing
benefits that must be given up and/or new costs that must be incurred. And these gains and losses
represent significant psychological switching costs.
A traditional economic perspective would say we merely need to consider the net benefit of the
innovation being offered. If the benefits minus the costs are positive, the product stands a chance of
being adopted. If not, it likely will fail. Forty years ago, Everett Rogers called this concept “relative
advantage” and identified it as a key driver in new product adoption.2
But research shows that consumers often do not behave in this objective manner. It has been
shown that consumers psychologically overweight things they currently have, but are being asked to
give up (i.e., potential “losses”) relative to things they don’t have, but could receive (i.e., potential
“gains”). And this overweighting typically is by a factor of two or three.3 Therefore, while the
objective net benefit may favor the innovation over the incumbent product, the psychological net benefit
may do just the opposite.
This thinking can be used to explain (1) why consumers are reluctant to buy seemingly attractive
goods and services and (2) why developers fail to anticipate this reluctance to adopt. It also suggests
strategies to increase the likelihood of new product adoption.
The Psychology of Gains and Losses4
In 2002, the Princeton psychologist Daniel Kahneman won the Nobel Prize in Economics for a
body of work that explored how individuals make decisions. The centerpiece of that work was
Prospect Theory, a concept developed with the late Amos Tversky that sought to explain a person’s
response to changes in monetary and non-monetary wealth. Importantly, Kahneman and Tversky
were interested in how people actually behave, not in how economic theory suggests they should
behave.
Much of their insight is captured in Figure 1, which maps the objective or actual “gains” and
“losses” of an opportunity (or prospect) onto the psychological impact of those gains and losses. If a
person receives an unexpected $600 tax return, for instance, that $600 will create some psychological
pleasure or satisfaction, indicated by V(+$600). Similarly, if that same person receives a $200 parking
ticket, that $200 will lead to some psychological pain, indicated by V(−$200). While slightly harder to
conceptualize, the very same framework applies to non-monetary gains and losses. If one
unexpectedly wins a bottle of wine as in a raffle, it will create some pleasure [V(+wine)] and if one
accidentally drops an earring into the garbage disposal, it will create some mental pain [V(−earring)].
As argued by Kahneman and Tversky, what drives behavior are these psychological reactions to
gains and losses, and not the objective gains and losses themselves.
2
3
See Rogers, Everett M. (1962, 1995), Diffusion of Innovations, Fourth Edition, The Free Press, New York
See Kahneman, Daniel and Amos Tversky (1979), "Prospect Theory: An Analysis of Decision Under Risk," Econometrica, 47
(2), 363-391, and Thaler, Richard H. (1980), “Toward a Positive Theory of Consumer Choice,” Journal of Economic Behavior and
Organization, 1, 39-60.
4
This section comes largely from Kahneman, Daniel and Amos Tversky (1979), "Prospect Theory: An Analysis of Decision
Under Risk," Econometrica, 47 (2), 363-391.
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There are several critical aspects of this behavior, each of which reflects an underlying, almost
universal, response to the opportunities every consumer faces.
Figure 1
The Prospect Theory Value Function
Subjective Value
(i.e., Psychological Impact)
Current
Wealth State
or
“Status Quo”
Objective
Losses
V(+$600)
– $200
+$600
Objective
Gains
V(– $200)
Source: Adapted from Kahneman and Tversky (1979), "Prospect Theory: An Analysis of Decision Under Risk," Econometrica, 47 (2), 363-391.
Rule #1: Individuals are Sensitive to Gains and Losses
First, rather than evaluate outcomes
in an absolute manner, individuals evaluate outcomes in terms of “gains” and “losses” relative to
some salient reference point. Such sensitivity has long been observed in the physical world, where
individuals are better able to judge changes in, say, temperature than they are able to judge absolute
temperatures. Therefore, a 50°F day feels pleasingly warm in the winter, but uncomfortably cold in
the summer. The same holds true in the economic world, where the person who unexpectedly wins
a $100 door prize experiences happiness, while the person who receives a $100 speeding ticket
experiences displeasure, regardless of their underlying wealth state. In Figure 1, “gains” are mapped
in the upper right hand quadrant and “losses” are mapped in the lower left hand quadrant
Rule #2: Reference Points Matter
Second, these “gains” and “losses” are evaluated with
respect to some salient reference point—typically a person’s “status quo” or current state of being.5
Relative to this status quo, additions to one’s state of being are viewed as “gains” and subtractions
from that state are viewed as “losses.” In a market setting, for instance, provide a consumer with
some new benefit and it will be perceived as a gain; take away an existing benefit and it will be
viewed as a painful loss. Conversely, reduce a current cost and it will be perceived as a gain; impose
a new cost and it will be treated as a loss.
Importantly, what constitutes the “status quo” need not be the same across individuals. For the
typical consumer in France, the status quo price for gasoline may be the equivalent of $4 per gallon.
5
Reference points other than the status quo may sometimes be used to assess gains and losses. In particular, aspiration
levels or expectations might provide the reference point. For instance, if a worker expects a year-end bonus of $5,000, but does
not receive it, this may be coded as a “loss” even though no money was actually sacrificed. Similarly, if one expects a bad
outcome, such as owing money on one’s tax return, and that bad outcome does not materialize, it may be viewed as a “gain.”
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Why Consumers Don't Buy: The Psychology of New Product Adoption
For the typical consumer in the United States, the status quo is closer to $1.75 per gallon. Thus, when
the Frenchman encounters prices of $3 per gallon, he is ecstatic, but when the American encounters
those same prices, he is outraged.
Rule #3: Decreasing Marginal Sensitivity
Third, the curve for gains in concave and the curve
for losses is convex, reflecting most people’s decreasing marginal sensitivity to both gains or losses.
Rule #4: Aversion to Losses
Finally (and critically, for our purposes), consumers do not treat
comparably sized gains and losses the same. In the language of psychologists, “losses loom larger
than gains.” Being forced to give up a specific benefit creates significantly more pain than getting
that same benefit creates pleasure. Researchers have labeled this asymmetry “loss aversion” and it is
captured in Figure 1 by the fact the downward curve for losses is far steeper than the upward curve
for gains.
At some level, we are all familiar with loss aversion. Most people’s reluctance to take an evenmoney bet on the toss of a coin can be attributed to loss aversion—while winning $50 would provide
pleasure, losing $50 would foster an even greater pain. More broadly, researchers find that “losses”
typically prove to be two to three times more painful than comparably sized “gains” prove
pleasurable.6 This has been shown for money, as in the case of gambles, as well as for apartments,
hunting licenses, coffee mugs, and a host of other market goods (see Exhibit 1).
The Endowment Effect
The end result is something the behavioral economist Richard Thaler has labeled the “endowment
effect”—people value items in their possession (or part of their endowment) more than they value
items not in their possession. For instance, as reflected in Figure 2, our valuation of the TiVo feature
“pause live TV” will depend on whether or not that feature is currently part of the our status quo.
Figure 2
The Endowment Effect—The Impact of Possession on Valuation
When we Currently Don’t Have It
When we Currently Do Have It
Currently
Possess
Pause Live TV
V(Pause Live TV)
–Pause Live TV
Currently
Do Not Possess
Pause Live TV
Pause
Live TV
V(–Pause Live TV)
6
See Thaler, Richard H. (1980), “Toward a Positive Theory of Consumer Choice,” Journal of Economic Behavior and
Organization, 1, 39-60, and Kahneman, D., J. Knetsch, and R. Thaler (1990), “Experimental Tests of the Endowment Effect and
the Coase Theorem,” Journal of Political Economy, 98 (6), 1325-1348.
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Consider Mr. A, who currently does not have the feature “pause live TV” as part of his
endowment, and Mr. B, who does. For Mr. A, obtaining the feature would be viewed as a
pleasurable gain, as reflected in the left hand graph of Figure 2. But for Mr. B, to give up the feature
would be viewed as a painful loss, as reflected in the right hand graph. And given the asymmetric
nature of gains and losses, Mr. B’s loss would be two to three times more painful than Mr. A’s gain
would be pleasurable. Thus, it is likely the case that Mr. B would be willing to spend more (in
money, time, or effort) to retain “pause live TV” than Mr. A would be to obtain it for the first time.
The Nature of Innovations: Giving and Getting
What does any of this have to do with innovations? Almost by definition, innovations demand
change. More precisely, the adoption of an innovation almost always involves giving up things we
currently have and getting other things we do not have. This could involve benefits, where some old
benefits are sacrificed, but new benefits are obtained. With Webvan, for instance, we give up the
ability to “thump the melon” to find the ripest fruit, but we get the convenience of home delivery. It
could also involve costs, where some old costs are now avoided, but new costs are incurred. In
adopting XM satellite radio, one avoids time-consuming commercials, but must pay $9.95 per month
to obtain the service. As reflected in Table 1, most innovations have this “give” versus “get”
dynamic.
Table 1
The “Gives” and “Gets” of Innovation
Innovation
TIVO (Digital Recorders)
Electric Cars
Online Grocery (e.g., Webvan)
NetFlix (DVD Rentals by Mail)
Satellite Radio
New Drugs
New Medical Procedures
Wind Energy
What you “Give Up”
Ability to Play Rentals
Easy Refueling
Ability to Select Freshest
Spontaneity
Free Music
Low Cost
Comfort w/ Procedure
Unobstructed View
What you “Get”
Easy Recording
Environmental Friendliness
Home Delivery
Increased Selection
Better Selection
Fewer Side Effects
Better Outcomes
Clean, Renewable Energy
But Prospect Theory and the endowment effect highlight that the benefits being given up will
loom larger than the benefits to be obtained—larger by a factor of two or three. Similarly, the new
costs encountered will loom larger than the old costs now avoided—again, by a factor of two or three.
As a result, it is not sufficient for an innovation to be objectively better than the product it seeks to
replace, it must be significantly better to overcome the biases consumers bring to their analysis.
To highlight the impact of these gains and losses, consider the scenarios presented in Figure 3,
which represents three possible changes to costs and benefits from an innovative product offering.
For our purposes, each of these scenarios can be assumed to offer the same “net benefit.”
In Scenario 1, the new product offers the same benefits as the incumbent product, but at a lower
cost. This lower cost might take the form of a lower price, a lower level of effort, or a lower time
commitment. A generic drug at 50% the price of the branded alternative would be an example of
such an offering. So would the introduction of a new formulation of an existing drug that required a
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Why Consumers Don't Buy: The Psychology of New Product Adoption
single dose per day as opposed to two or three doses. From both an economic and a psychological
perspective, the new product offering will be perceived as a pure gain—namely, the monetary cost
savings associated with the generic or the effort savings associated with the reformulation—and the
consumer response should be positive.
Figure 3
The Costs and Benefits of New Products (with “net benefit” held constant)
No
Change
Benefits
No
Change
Costs
Benefits
Costs Benefits
Costs
Scenario 1
Scenario 2
Scenario 3
In Scenario 2, the new product offers all of the benefits of the incumbent product plus more, but at
a cost identical to the incumbent. The introduction of the search engine “Google” might fall into this
category. Google required no additional cost to a potential user—its interface was virtually identical
to those of the search engines it sought to replace. But the added benefit, in the form of more useful
“hits,” was striking. At little to no additional cost to consumers, Google offered better results. Again,
from both an economic and a behavioral perspective, such a scenario would be perceived as a pure
gain and consumer response should again be positive.
But most innovative new products do not follow Scenarios 1 or 2. Instead, they tend to look like
Scenario 3—greatly increased benefits, but at some cost of time, effort, or money relative to the
existing alternative. Consider a more effective drug at twice the price of the current alternative. Or
satellite radio, with better reception and selection, but at the cost of a new radio and a monthly fee.
At a purely rational level, Scenario 3 is not that different than Scenarios 1 and 2. All offer an
alternative to an incumbent product and promise the same net benefit. But from a psychological
perspective, Scenario 3 is vastly different. Whereas Scenarios 1 and 2 offer pure gains, Scenario 3
requires the simultaneous consideration of gains and losses. Asking consumers to make such
tradeoffs will often prove fatal—perhaps not the sole reason for a product’s failure, but a contributing
factor.
Consider some specific innovations where gains and losses are present and where asking
consumers to make such tradeoffs proves difficult.
The Electric Car
Take the adoption of the electric car, long touted as a replacement for the
gasoline-powered car. The adoption of any electric car requires a host of tradeoffs. The user gains
greater energy efficiency, lower cost of operation, and a less polluting vehicle. To gain these benefits,
however, one gives up size, convenience, and cruising range. The problem is, size, convenience, and
cruising range have long been part of the typical car owner’s status quo. Thus, giving them up will
feel like a “loss,” the impact of which will be quite severe due to the overweighting of losses. In
contrast, the benefits of the electric car will be viewed as “gains,” and underweighted. Even if the
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objective tradeoffs favor the adoption of the electric car (which is a big “if”), the psychological
tradeoffs strongly favored the existing gasoline-powered car.
Is this overweighting of losses relative to gains the only reason electric cars have failed to gain
traction in the marketplace? No! Is it a factor? Yes! To deny this would run the risk of repeating this
mistake with the long-awaited fuel cell vehicles. Touted by General Motors and viewed by many as
the means to wean consumers from gasoline, fuel cell vehicles will likewise present consumers with
both gains and losses. When first introduced, and for many years after, fuel cell vehicles will offer
lower mechanical reliability, higher monetary costs, and less convenient refueling than the gasolinepowered cars they are meant to replace. No matter the benefits, these costs, unless addressed, will be
viewed as losses and will greatly hinder adoption.
Online Groceries
A similar analysis can be conducted for online grocery shopping, the
ongoing struggle of which has been its inability to attract a critical mass of consumers. The principle
selling point of online grocers is convenience. No longer does a consumer have to travel to the
grocery store, wander the aisles, stand in line at the checkout counter, and travel home from the store.
As benefits not part of a consumer’s current state of being, these features should be viewed as
“gains.” To obtain these gains, however, a consumer has to give up other benefits. No longer can
they personally select the ripest melon or the perfectly marbled cut of meat. No longer can their
dinner plans be inspired by “what looks good today.” And no longer can they use the store as a
mental prompt for what items are and are not needed. By switching to an online grocer, these
foregone benefits became “losses.”
The same holds true if one assesses online grocery shopping from the perspective of costs. For
most individuals, the effort and time associated with shopping has long been part of a shopper’s
status quo, a necessary evil. Thus, reducing effort or time would not be viewed as a reduction in a
loss, but as a gain. In contrast, having to spend time on the computer, having to pay for delivery, and
having to be home at or near the time of delivery would entail new costs and be viewed as losses.
Given the overweighting of the existing benefits consumers have to forego and the new costs they
have to incur (both treated as losses) and the underweighting of the new benefits they will obtain and
the existing costs they will now avoid (both treated as gains), these tradeoffs prove daunting. Even if
the Webvans and Peapods of the world had fully and properly quantified the objective costs and the
objective benefits of their innovation, they would have missed the biased assessments virtually every
consumer brought to their decision making. Are these the only factors that have led to the struggles
of online grocers? No. Have they contributed? Absolutely.
Biopure
This same mistake was made at Biopure, a small Massachusetts-based biotech firm
that is trying to develop a human blood substitute to replace the need for donated blood. In the
process of conducting clinical trials, the company realized that a variation of its human product could
be used in the veterinary market to treat dogs suffering from acute blood loss and anemia. Biopure
received FDA approval for such a product in 1998 and called it “Oxyglobin.”
A thorough assessment of the animal market by Biopure in the 1990s seemed to suggest great
pent-up demand for such a product. First, over 80% of veterinarians reportedly were dissatisfied
with current animal transfusion alternatives. Second, each year less than 10% of the roughly 3.5
million dogs that would have benefited from a transfusion actually received one—the rest were
treated with iron tablets and cage rest. Third, the dominant source of donated blood, donor animals,
required individual veterinary practices to house, feed, and care for these animals. And finally,
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Why Consumers Don't Buy: The Psychology of New Product Adoption
studies suggested that most doctors were relatively price insensitive to a viable blood product, at
least when it came to product trial. Given these factors, who could blame Biopure for viewing the
veterinary market with optimism?
Nonetheless, Oxyglobin sales have languished. Launched in late 1998, Biopure has sold fewer
than 40,000 units of Oxyglobin in any given year—far below what even conservative estimates might
have predicted. The problem? Oxyglobin requires vets to change how they treat their patients. It
offers a more rapid and likely recovery (gains), but forces vets to forego a set of well-entrenched
benefits, such as comfort with a known procedure with predictable complications (losses). Again,
with losses looming larger than gains, such tradeoffs have proven daunting and most vets have
maintained the status quo. To date, while a small percentage of veterinarians have fully adopted
Oxyglobin as part of their animal care, most have either ignored the product or have come to view it
as a treatment of last resort.
As shown in Table 1, we could identify similar tradeoffs across most innovative new products.
TiVo offers the easy recording of one’s favorite television shows, but eliminates the ability to play
rented movies. NetFlix, with its DVD rental-by-mail business model, increases movie availability
and selection, but decreases the ability to be spontaneous in one’s movie preferences. And attempts
to develop wind farms on the East Coast of the United States promise clean, renewable energy, but at
the cost of an obstructed ocean or mountain view. Give up one set of benefits to gain a second set of
benefits. Replace one set of costs with a new set of costs. But if consumers overweight the benefits
they have and underweight the benefits they can get, such tradeoffs will rarely prove attractive.
Making Matters Worse
If the biased weighting of losses and gains wasn’t enough, the nature of innovations often
exacerbates the tradeoffs consumers are asked to make. Rarely is a potential buyer faced with costs
and benefits that are comparable in their timing, their certainty, or their ability to be quantified.
Consider something as simple as the timing of the losses and gains of new product adoption.
Losses, in the form of out-of-pocket expenses, behavior change, or foregone benefits, are almost
always immediate. Quite often, however, the gains are delayed. Perhaps there is a learning period,
or the benefits accrue over the life of the product, or the benefits don’t manifest themselves until
some later point in time. Such is the case with electric cars. While the costs of higher price, limited
driving range, and smaller size are experienced immediately, the benefits of reduced emissions will
only bear fruit in the distant future.
A similar tension arises when one considers the certainty of the losses one incurs versus the gains
one receives. Compact fluorescent light bulbs—which last ten times as long but cost five times as
much as standard incandescent light bulbs—provide an example. While most cost/benefit analyses
would favor the longer-lasting fluorescent bulb, the relative certainty of the losses and gains may
favor the standard bulb. While the increased cost of the fluorescent bulb is certain, the longer life is
only promised.
Finally, consider the ability to quantify the losses and gains one expects from product adoption.
Quite often, innovative new products offer a qualitative set of benefits, such as convenience or quality,
for a quantifiable cost, such as money. Satellite radio faces this dilemma. XM Radio and Sirius
provide listeners with greater selection, higher fidelity, and broader geographic coverage—all
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desirable features, but features that are qualitative in nature. To obtain these benefits, the consumer
must purchase a $200 radio and be willing to pay $10 or more per month for service. The gains are
hard to quantify; the costs are easy to quantify.
Together, the timing, certainty, and ability to quantify costs relative to benefits only serve to
magnify the overweighting of losses and the underweighting of gains.
The Psychology of the Innovator—The “Developer’s Curse”
But shouldn’t developers understand the consumer’s perspective? Who knows more about an
innovative new product and its potential benefits than the person or people who developed it? Who
better to understand and predict a consumer’s response to that new product? Certainly, the
developers of Peapod and Webvan, most with a long history in the supermarket industry, should
have had a feel for consumer wants and needs. And who better to develop a replacement for the
dollar bill than the United States Mint. Yet online grocers and the dollar coin have gained little
consumer traction. Why? As I will now argue, for at least three reasons, innovators may be
particularly ill-suited to judge the potential of their innovations.
Problem #1: Self-Selection
Who develops online grocery stores? Who goes to work for
a company that makes fuel-cell cars? Who invests in digital television recorders, such as TiVo? The
answer: “Believers!” People tend to develop or invest in products, or work for companies, that they
themselves would use or support. The person who despises grocery shopping is more likely to
develop a Peapod-like concept than a person who enjoys shopping. The person who cares about the
environment is more likely to embrace the concept of the fuel-cell car than the person who doesn’t
recycle. And a gadgets person is more likely to be enticed by TiVo than a person who likes to read.
Unfortunately, the values that drive a developer or a development team to innovate may not be
widely shared by the general public. In many cases, developers tend to be outliers. Consider the
hybrid car. On the dimension of “environmental sensitivity,” the conviction of the general public
likely will form a bell-shaped curve, as shown in Figure 4, with some individuals not at all concerned
about the environment, most people somewhat concerned about the environment, and other people
highly-concerned about the environment. In all likelihood, the person who actively engages in the
development of a new, environmentally-friendly vehicle falls to the right (perhaps the extreme right)
on this bell curve. Similar analyses could be conducted on the dimension of convenience for those
who develop online stores or on the dimension of flexibility for those who developed TiVo.
Figure 4
Valuing an Innovative Feature
Number of People
Typical
Consumer
Low
Typical
Innovator
High
Importance of the Feature
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Now, being on the extreme when it comes to environmentalism (or desire for convenience or
flexibility) has many benefits when it comes to product development. Most notably, it allows a
person to identify a new concept before others might. But it also means that a developer’s valuation
of the critical feature or set of features may not (and, often, will not) match that of the typical
consumer. The problem arises if the developer projects his or her own preferences onto the typical
customer. Might this occur? Think about one common recommendation when it comes to product
development. In developing radically new products, we are sometimes told to avoid listening too
closely to what customers say they want, for they are poorly equipped to imagine the possibilities.
But, if you don’t listen to customers, who do you listen to? Most likely, yourself.
Problem #2: A Clash in Perspectives
The second problem facing developers is a “clash in
perspectives.” As we now know, a central premise of prospect theory is that individuals evaluate
outcomes relative to some reference point. Not surprisingly, the reference point a consumer most
likely uses is his or her current situation. A person’s reference point for, say, gas mileage would
likely depend upon what type of car that person drives. And his benchmark for food shopping
would be based on his favored supermarket, with gains and losses in convenience viewed relative to
the typical shopping trip to that store. Simply put, the status quo for the typical consumer will be
that which the consumer currently knows.
The same may not be true for the developer who is fully-invested in their innovation. Imagine
being on the development team for TiVo, every day interacting with others who imagine what life
will be like once TiVo is fully adopted by consumers. During the development process, you
experiment with various prototypes and become comfortable with using TiVo. It is not surprising
such a person would come to view TiVo, with all of its benefits, as part of his status quo.
This difference in perspective serves to magnify the gap between the developer and the typical
consumer. In particular, whereas the typical consumer will overweight the benefits of the entrenched
alternative by a factor of two to three, the developer (who views his innovation as the status quo) will
overweight the benefits of that innovation by a factor of two to three.
As shown in Figure 5, this can result in what I identify as the 9X problem—a mismatch of 9 to 1
between what innovators think consumers want and what consumers actually want. If we assume
V(New Product) represents the valuation of a new product for a “neutral” consumer, the typical
consumer’s valuation would be in light of being endowed with the old product, or V(New
Product|Old Product). In contrast, the typical developer’s valuation of the new product would be in
light of being endowed with that new product, or V(New Product|New Product). The result is a
difference of up to 9X.
Figure 5
The 9X Problem: The Compounding of Biases
Consumer’s View
V(
New
Product
Old
Product
Neutral View
)
<
V ( Product )
New
<
V(
New
Product
Consumer’s Endowment Bias
Developer’s Endowment Bias
(A 3:1 underweighting of new)
(A 3:1 overweighting of new)
9X
10
Developer’s View
New
Product
)
Why Consumers Don't Buy: The Psychology of New Product Adoption
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On first glance, such a difference in perspective seems staggering, yet it helps explain a rule some
managers have adopted. Intel’s Andy Grove and others have stated that for rapid, widespread
adoption, a new product has to offer a ten times improvement over the incumbent alternative.7 The
clearest examples of such improvement come from medicine, where angioplasties offer a ten-times
improvement over bypass surgeries, where psychiatric drugs offered a ten-times improvement over
frontal lobotomies, and where MRIs offer a ten-times improvement over traditional X-rays.
Problem #3: The Curse of Knowledge
A third problem facing developers is something
researchers have called “the curse of knowledge”8—i.e., people find it difficult to remember what
they knew prior to knowing what they now know. In other words, once we learn some information,
we find it difficult to appreciate what a person who does not know that information might be
thinking.
Behavioral researchers Colin Camerer, George Loewenstein, and Martin Weber argue that, in
theory, better-informed individuals should be able to anticipate the judgments of less-informed
individuals. In selling one’s home or car, for instance, a seller has more information than a potential
buyer and should be able to leverage this to their advantage. But this requires the seller to place
themselves in the role of the buyer and ask, “What would I do if I were the buyer?” These
researchers found that most sellers are unable to do this. Instead, sellers consistently give buyers
credit for knowing more than they actually know.
Applied to product development, the curse of knowledge has damaging implications. Not only
do developers tend to value the features they are offering more than the typical consumer (Problem
#1), and not only do they tend to view “not having those features” as a loss as opposed to “having
those features” as a gain (Problem #2), but they systematically underestimate this difference in
perspective.
Consider the “inside” perspective of someone who has been developing a product or a concept
over several years:
•
•
•
Many years experience with the technology and product concept
Recognized need for the product
Convinced that the product works
Now compare that to the “outside” perspective of the typical consumer:
•
•
•
Seeing the technology for the first time
Unaware or unconvinced of the need
Skeptical as to whether the product works
Combined with the roadblocks identified in Problems 1 and 2, we are left with the “inside” versus
“outside” perspectives identified in Figure 6. In particular, having spent a great deal of time with
the innovative concept and product, developers simply know more than the consumer, who is seeing
the product for the first time. But, they fail to recognize this fact, assuming consumers are further
7
See, for example, “Churning Things Up,” by Andy Grove, in Fortune Magazine, July 21, 2003.
8
First proposed by Colin Camerer, George Loewenstein, and Martin Weber in “The Curse of Knowledge in Economic
Settings: An Experimental Analysis,” in The Journal of Political Economy, 1989, 1232-1254.
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Why Consumers Don't Buy: The Psychology of New Product Adoption
along the learning curve and better able to understand and acknowledge the value of the innovation
than they actually are.
Figure 6
The Inside versus The Outside View of New Products
Insider’s (Innovator’s) View
• 5, 10, 20 years experience with product
or technology
• Benefits/Needs are obvious
• Fully trusts product
• A self-selected believer
• Status Quo includes new features
Outsider’s (Customer’s) View
• Seeing product for 1st time
• Needs are not obvious
• Skeptical of claims
• Middling valuation of promised benefits
• Status Quo includes existing features
To highlight the tension inherent in Figure 6, I once had an executive vent in frustration, “Don’t
these people understand what we are offering them?” More often than not, the answer is “No!” And
the problem lies not with the consumer’s failure to “understand,” but with the developer’s failure to
anticipate and appreciate this predictable lack of understanding.
The Bottom Line: How Much Change Are You Asking of Consumers?
Having painted a rather bleak picture of new product adoption, what is a firm to do? The first
step is to ask, “How much change are you asking of consumers?” In particular, what losses are you
asking them to incur, both in the form of new costs (of money, time, or effort) and foregone benefits.
Therein lies both the opportunity and the dilemma facing the developers of innovations.
Innovations create value through product change. Whereas the internal combustion engine
converts gasoline to energy, a fuel cell relies upon hydrogen. Whereas a film camera captures analog
images, a digital camera captures 1’s and 0’s. And while the Washington dollar is printed on paper
with a lifespan of 18 months, the Sacagawea dollar is made of metal that lasts 30 years. As reflected
in Figure 7, it is these product changes that create real value. The greater the technological change,
the greater the potential for a breakthrough product.
But product change often necessitates behavioral change. How we refuel our car, how we
develop our pictures, and how we think about “spare change” all change.
And with these
behavioral changes comes resistance—resistance to giving up old benefits and resistance to incurring
new costs. The greater the required changes, the greater the potential resistance.
This creates the tension identified in Figure 7. While product change is often necessary for value
creation, minimizing behavioral change helps to capture that value. In the end, we are left with a
simple, but powerful, 2 x 2 matrix.
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Why Consumers Don't Buy: The Psychology of New Product Adoption
Figure 7
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Capturing Value from Innovations
High
Strike
Out
Long
Haul
Low
Tinkering
Home
Run
Low
High
Behavioral
Change
Required
(Value Capturing)
Product Change Involved
(Value Creation)
Tinkering By far, the simplest and most common new products are those that entail limited
product change and limited behavioral change. The tendency of packaged goods companies to offer
new and improved versions of an accepted product provides the clearest example of such
“Tinkering.” While potentially profitable, there is limited opportunity for a breakthrough product at
this level. It is difficult to create significant consumer value simply by double stuffing an Oreo.
Strikeout In contrast, the products a firm should avoid developing are those that offer little in
the way of product change, thereby limiting value creation, but which require significant behavioral
change. The gains received are too few and the costs, in the form of behavior change, are too great—
hence, a “Strikeout.”
Attempts to replace the highly familiar QWERTY keyboard with more
ergonomic keyboards, such as Dvorak, provide one striking example. While the physical act of
rearranging letters on a keyboard may seem simple enough, it requires a profound change in user
behavior but promises only marginal improvement in typing speed. Nothing could be more
damaging to product adoption. Even if objectively assessed, such a tradeoff might prove
unattractive. But with losses looming larger than gains, such a tradeoff is disastrous.
Long Haul
But many innovative new products do offer a technological leap, creating great
value in the process. However, these same products typically require significant behavioral change.
Past attempts at an electric car and future attempts at a fuel cell car offer examples. While offering
radically innovative propulsion systems, they also alter the way one drives. No longer can a driver
refuel at virtually any street corner. Instead, a driver now must plan his travel to avoid “running out
of fuel.” Similarly, the electric car limits driving range and vehicle size, while the fuel cell car, with
its reliance on hydrogen, may call to mind the Hindenburg. These changes suggest a long, slow road
to adoption—the “Long Haul.”
Home Run
Finally, there are those innovations that offer great product change, but require
minimal behavior change—the best of both worlds. Value is created by offering a fundamentally new
way of achieving some goal. And value is captured by limiting the change required of consumers. I
have identified this combination as “Home Run” for it is here that innovative new products stand the
greatest chance of both short-term and long-term success.
In contrast to the electric and the fuel cell cars, consider Honda’s and Toyota’s rollout of the
hybrid-electric vehicle, or HEV. Technologically, HEVs provide drivers with both a traditional
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Why Consumers Don't Buy: The Psychology of New Product Adoption
internal combustion engine and an innovative, self-charging electric engine, perhaps the first real
change in propulsion in mass-produced automobiles in 100 years. In the process, these vehicles boost
gas mileage by as much as 100%. Yet, there are no benefits given up and only limited costs to be
incurred (principally in the form of a slightly higher price, although even this is not obvious to most
consumers). Quite simply, there are few, if any, losses to loom more heavily than gains. These cars
require no behavior change! They look, drive, and refuel like any other car on the road. [Ironically,
one obstacle to HEV adoption is consumers’ mistaken belief that behavior change, such as the need to
plug the car in at he end of the day, is required!] While it is still too early to declare victory for
Honda’s and Toyota’s efforts, HEVs are traveling a much easier road to adoption than purely electric
vehicles ever did or than fuel cell vehicles may have in the future.
Taking Action: What’s a Firm to Do?
Fundamental product change helps create lasting value for consumers. But behavior change
restricts a consumer’s willingness to accept and capture that value. Whether a firm understands this
tension and how it manages it may determine whether the innovation succeeds or fails in the
marketplace.
Two broad sets of strategies for managing innovations arise from this analysis. The first set of
strategies involves acceptance of the underlying resistance to change. The second and, perhaps, more
interesting, set of strategies involves the proactive minimization of this resistance.
Accept Resistance
For most innovations, behavior change is a given. The telephone changed how we contacted
others, the automobile changed how we dealt with distance, and the personal computer changed the
way we measured work productivity. For these technologies, behavior change is perhaps
unavoidable, forcing firms to accept and manage the resulting consumer resistance.
Strategy #1: Brace for the Long Haul
The simplest strategy for dealing with consumer
resistance is to accept it and brace for the slow adoption that is inherent in the Long Haul. Geoffrey
Moore’s concepts of crossing the chasm and gaining traction with the “early majority” apply here.9
While this may be difficult to do, a firm can be quite successful with such a strategy. But—and here
is the challenge—a firm must be ready for the long and potentially painful adoption process that
follows. Failure to recognize this could lead a firm to forecast greater initial demand than will ever
materialize. Webvan and TiVo offer examples of firms that did not appreciate the degree of behavior
change they required of their consumers. Yet, the slow steady growth of cable television, as typified
by ESPN, offers a nice counter-example. Radically innovative at the time of its introduction, cable
television had to overcome the well-ingrained belief that television broadcasts should be “free.” It
took 25 years, but ESPN is now in 80% of the households in the United States. Requiring similar
behavioral changes, the success of the telephone, the VCR, and the personal computer offer other
examples of slow, steady adoption.
Strategy #2: The 10X Improvement
The complement to this first strategy is the brute
force method of developing innovations—i.e., make the relative benefits overwhelming. Even with
9
14
See Geoffrey Moore (1991, 1999), Crossing the Chasm, Harper Collins, New York.
Why Consumers Don't Buy: The Psychology of New Product Adoption
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the overweighting of losses relative to gains, make sure that the tradeoff greatly favors the
innovation. Andy Grove’s 10X rule is an example of such a strategy.
Minimize Resistance
For many firms, however, the Long Haul is unattractive and innovations that offer 10X
improvements are few and far between, highlighting the need for minimizing, as opposed to
accepting, consumer resistance.
Strategy #3: Make it Behaviorally Compatible
First and foremost, a firm can offer a new
product that is fully compatible with existing behavior. Toyota’s and Honda’s hybrid electric cars
qualify in this regard. Similarly, software developers strive to make their updated applications fully
compatible with previous versions. Finally, DVD players provide a wonderful example of the power
of behavior compatibility.
Given the large installed based of VCRs and associated videotapes, one might have predicted
significant consumer resistance to DVD players. But while DVD players offer a dramatic
technological change, they demand behavior that is highly consistent with that required for VCRs
and CD players. They are operated similarly, they play media that are rented from the same
locations as videotapes, and that media is in a form that is visually and operationally identical to
compact discs. The only potential shortcoming of DVD players is their inability to record. But this is
a feature that many VCR owners have found they rarely (if ever) use.
In contrast, while over 50 million DVD players have been sold since 1997, consumers have
purchased just over one million TiVo units in the same period. The difference? TiVo offers the
ability to record, a rarely used feature of most VCRs, and eliminates the ability to play rented media,
the most used feature of the VCR. DVD players did just the opposite. TiVo necessitated behavior
change. DVD players minimized that change.
Strategy #4: Seek Out the Unendowed
Behavioral compatibility is not the only means to
minimize behavior change, however. In particular, a firm could seek out consumers who are not
currently endowed with the existing alternative. TiVo, for instance, may have been better targeted at
first-time entertainment system buyers than those who already owned a VCR. First, these consumers
may have been first-time buyers because they did not value the dominant benefits offered by VCRs.
Second, a first-time buyer would have been less likely to view a VCR as part of the status quo,
reducing the impact of foregoing the features that were unique to a VCR.
One hundred years ago, seeking out the unendowed was the masterstroke of George Eastman.
Upon introducing his $1 Kodak Brownie camera in 1900, rather than target professional
photographers and serious amateurs, he marketed his innovation to first-time buyers. In doing so, he
only needed to encourage new behavior, rather than change entrenched behavior. While the former
was a challenge, the latter would have been overwhelming.
Interestingly, professional
photographers and serious amateur photographers came to despise the Brownie, largely because it
offered a set of benefits they had learned to live without (e.g., ease of use, convenience) and sacrificed
a set of benefits that had become part of their status quo (e.g., perceived picture quality).
Strategy #5: Find Believers
Alternatively, a firm can always seek out consumers that
either greatly value the benefits to be gained or do not value the benefits to be given up. Such
thinking is captured in Clay Christensen’s concept of a “disruptive technology,” where a technology
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Why Consumers Don't Buy: The Psychology of New Product Adoption
initially gains traction in a small segment of the marketplace.10 In the case of fuel cell vehicles, for
instance, a firm could target consumers who are environmentally conscious. Alternatively, and
perhaps more realistically, it could target consumers for whom access to a central refueling station is
most practical. Consider an island community, such as Bermuda, where an entire day’s travel might
take a car owner no more than 10 miles from the center of town. In such places, convenient refueling
may be valued far less and emission-free transportation far more than in other places, making the
subsequent tradeoff attractive even after consumers’ biased assessment of gains and losses. Not
surprisingly, for many of these same reasons, Iceland, another island community, is at the forefront of
developing a fuel cell society.
Strategy #6: Eliminate the Old
Finally, if all else fails, a firm can try to eliminate the
incumbent technology. In few places is the logic of “elimination” more compelling than in the United
States Mint’s handling of the dollar coin. After the dismal marketplace failure of the Susan B.
Anthony coin in 1979, the Mint reasoned that the failure was because the coin looked and felt too
much like the Washington quarter. Twenty years later, in 1998, it came out with the gold-toned,
smooth-rimmed Sacagawea dollar coin. Again, failure! The problem? The U.S. Mint has steadfastly
refused to withdraw the dollar bill from circulation. Not surprisingly, consumers have stuck with the
dollar bill and the Sacagawea coin has become little more than a curiosity.11
To appreciate how things might have been different, one only need look north to Canada. In 1987,
the Canadian Mint replaced its one-dollar bill with the “loonie,” a gold-colored dollar coin. At the
same time, it removed the Canadian paper dollar from circulation. Nine years later, it did the same
with the two-dollar bill, introducing the “toonie.” Today, both the loonie and the toonie are wellaccepted, widely-used units of currency throughout the country.
Conclusion
By some estimates, over two-thirds of new products fail in the marketplace, with innovative new
products failing even more often than that. Surely, these products fail for a host of reasons. Many
are offered by firms that lack the expertise, resources, or commitment to see the product through to
success. Other products may lack an objective net benefit, offering too few benefits for too great a
cost. But, even when supported by well-intentioned firms and even when offering objective
improvements over existing alternatives, the success of an innovative new product is far from certain.
Much of this uncertainty arises from the psychology of gains and losses. Firms in the business of
developing innovative new products must understand the biases consumers bring to their decision
making. They must understand the changes their products require of consumers. And they must
never underestimate a consumer’s reluctance to change. But far too many do!
10
11
See Clay Christensen (1997), The Innovator’s Dilemma, Harvard Business School Press, Boston, MA.
For those who argue that the dollar coin has failed not because of the “status quo bias,” but because it offers no real value
to consumers, consider the following: Would you trade the quarter coin for a “quarter bill”? If not, why is the dollar bill
preferable to the dollar coin, but the quarter coin is preferable to the quarter bill? A compelling answer would be because we
have grown accustomed to both the dollar bill and the quarter coin, and to give either up would be viewed as a loss.
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Why Consumers Don't Buy: The Psychology of New Product Adoption
Exhibit 1
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Experimental Evidence of the Endowment Effect
The behavioral economist Richard Thaler defines the Endowment Effect as the overweighting of
goods included in one’s endowment relative to goods not held in that endowment. To highlight this
effect, he offers the following thought experiment:12
Two survey questions: (a) Assume you have been exposed to a disease, which, if contracted, leads
to a quick and painless death within a week. The probability you have the disease is 0.001. What is
the maximum you would be willing to pay for a cure? (b) Suppose volunteers are needed for
research on the above disease. All that would be required is that you expose yourself to a 0.001
chance of contracting the disease. What is the minimum payment you would require to volunteer for
this program? (You would not be able to purchase the cure.)
Rational economic theory would suggest that whatever answer you provide for (a) you should
also provide for (b). After all, a 0.001 chance of death is the same regardless of whether you have
been or could be exposed to it. However, if you are like most people, your answer to these two
questions will differ greatly. Thaler notes that a typical response is $200 for (a) and $10,000 for (b).
Such divergence can be explained by the overweighting of losses versus gains. In (a), having already
been exposed to the disease, finding a means to forego the risk of death would be viewed as a gain.
In contrast, in (b), currently being disease-free, exposing oneself to the disease would be viewed as a
loss. The result, with losses looming larger than gains, is the difference in answers for (a) and (b).
The economist Jack Knetsch offered a less dramatic, but more rigorous, example of the
endowment effect.13 At the start of two undergraduate classes, students were required to fill out a
short survey. As compensation, the students in one class received a decorated coffee mug. In the
other class, they received a large bar of Swiss chocolate. At the end of class, students were shown the
item provided as compensation in the other class and were told they could trade in the coffee mug or
chocolate bar they received for the other item. Based on a random preference for coffee mugs versus
chocolate, economics would predict that about 50% of the students would have chosen to trade in the
item they received for the one they did not receive. In practice, however, 90% of students elected to
stay with the item they were initially given, just as would be predicted by the endowment effect. To
give up an item one has incorporated into one’s endowment would be considered a loss. To obtain
an item one does not have in one’s endowment would be considered a gain. Given that losses loom
several times larger than gains, 90% of the students chose not to exchange the item they had received
at the start of class.
12
This thought experiment comes from “Toward a Positive Theory of Consumer Choice” by Richard H. Thaler, Journal of
Economic Behavior and Organization, 1980: 39—60.
13 This experiment comes from “The Endowment Effect and Evidence of Non-reversible Indifference Curves” by Jack L.
Knetsch, American Economic Review, 1989: 1277—1288.
17