In summary, the idea was raised by the Nobel-prize winning psychologistDaniel Kahneman that explores why people deviate from rational economicbehavior. This combined with other work, on how individuals valuechoices in the marketplace, define the basis on how people handle theintroduction of a new product or service.
The four behaviors that arise are: people evaluate new product asalternatives, based on perceived value rather than subjective value;they consider new products relative to points of reference to existingones; they view such references as benefits/gains orshortcomings/losses; and finally, the most important behavior, losses have a far greater impact than gains.
This leads to the endowment effect whichthe author reports as the behavior where people hold things theyalready have in much greater value than those they don't. In fact, itleads to a multiplying effect in the market where consumers value theirexisting holdings as three times more valuable, while organizationswith new ideas/products value their own holdings as three times asvaluable. Thus, to convince consumers to change from the old to the newproduct may require up to nine timesthe improvements over the older product. As the author explains, AndyGrove of Intel has held the belief that an innovaion that can transformthe industry rapidly needs to offer a 10x improvement over existingalternatives. (I know my Sharp Aquos HDTV doesn't quite reach thathigh, but I still like the switch over from my 25" inch Sony tuber :)
The author continues by giving several categories of probability: the Sure Failure, the Easy Sell, the Long Hauls, and the Smash Hits. AnEasy Sell indicates limited (small) changes to the existing product andlimited changes to the behavior necessary. A Smal Hit has significantchanges to the product but only limited changes to the behavior.
I strongly suggest you pick up a copy of the HBR to understand the full extent of this article.
This has direct impact on any new technology, a topic of constant focusfor us at dW. Every company wants the smash hit, but for many it ismore by accident than on purpose. However, often they focus onimprovements to products based on what they think is important, andduring the product development stage do not really consider the factorsof user adoption behavior because it is so hard to measure. I've comeacross so many cases where the technology is considered quite advancedby the technical team that develops, supported by surveys of groups ofthe bleeding edge customers who are already raring to use it; but, theyfall short when they call out to the general market which issignificantly slower to adopt the idea.
In fact, in some cases, the improvements are just not enough (per theabove marketing theory). In other cases, the perceived value of theproduct is just conveyed either adequately to the consumers, or by the right influencers who can change perception. Ittakes the right mix of technical know-how, eloquence, stubbornness,ingenuity, and charm to find the proper evangelists for a project. Butfirst you need to be able to find those who are fans of the idea in thefirst place (goes back to my other thought on building a fan-base); theevangelist themselves must be a convinced fan, or others willeventually consider them a sham.
This theory applies to the tens or hundreds of thousands of newprojects that start up on the internet. A product manager needs toconsider if the product falls into the win category of Smash Hit or will be a Long Haulsell as much as the innovation of the product itself. This meansunderstanding the user behavior and need for the product in the firstplace. The difficulty lies in quantifying the improvements.
In some cases, you can do it by this process:
- get a sample population of an existing alternative to the product
- investigate what part of the product they utilize the most, which has the biggest impact, or which causes the most pain
- measure how much of the time or effort is spent by users on those elements
- consider what, if any, improvements the new product has to those impacting elements of the old
- if the product improves the time- or effort-consumed for that element, measure how much it does so
- Consider this improvement versus the type of win you could get
The impact of the endowment effect is the old adage: people fear change.It's not fear per-se, but more inertia. To overcome the inertia, youneed to change perceptions. To grow customers and fans, you need tobuild the audience and community around the idea, to build up momentumof understanding and acceptance to overcome this inertia. (I mentionthat this is a crucial second step of the Open Source business model earlier)