Companies know that one of their best means to survive and prosper is by introducing new innovations. Unfortunately, despite the massive investments put behind this realization, new products fail at a shocking rate estimated by various studies at 40 percent to 70 percent. Of the 30,000 products introduced annually, between 70 and 90 percent disappear from store shelves within 12 months. It’s too easy to blame these failures on poor products. Consumers often turn away from goods that do offer improvements over existing ones. Consider TiVo's digital video recorder. Though it has garnered rave reviews from industry experts and users since the late 1990s, TiVo amassed $600 million in operating losses by 2005 because demand trailed expectations. This raises two questions: Why don’t people buy these goods? And why do companies keep offering products that buyers are likely to reject?
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People don’t like being changed. This has a significant psychological effect due to our many cognitive biases. One important cognitive bias that comes into play when it comes to the challenge of adoption is that we overvalue what we have. This results in a significant hurdle when, for example, health organizations try to shift Providers from hand written charts to electronic medical record. Kahneman and Tversky’s prospect theory holds that there are four characteristics of our responses to alternatives, the most important of which is “loss aversion”, the idea that losses have a far greater impact on people than similarly sized gains. In addition, the “endowment effect,” as described by Thaler, means that people irrationally overvalue goods in their possession over those they don’t have by a factor of close to three. Finally, compounding these effects is the status quo bias, which gets stronger over time.
Gains and losses: First off, people evaluate attractiveness of new products and services not on an objective scale, but on a subjective/perceived scale which is based on products they already own. Every benefit of the new product compared to the new one is considered a gain, and every shortcoming is considered a loss. The kicker is that potential buyers give losses a much bigger weight than gains in their decision making process. In fact, multiple studies have shown that gains have to outweigh losses 3:1 before customers will adopt the new product or service.
The endowment effect: Because of this loss aversion, people value what they have more than what they don’t have. In fact, multiple studies have shown that people demand 2-4 times more compensation to give up products that they already possess than they are willing to pay for those same items in the first place! It’s a curse of innovation.
Status quo bias: It explains why people tend to stick with what they already have, even when a better alternative exists. Studies have shown that the extend of loss aversion grows over time from a factor 2 to 4 – meaning that people’s pain perception of giving up something increases over time and reduces their willingness to trade up.
9X Effect: Gourville’s behavioral framework is formed around the new product or technology itself, the consumer who must adopt it, and the company that designs it. The failure of many products is the result of two related phenomena: Consumers overvalue the existing benefits of an established product by a factor of three, and executives and developers overvalue the new benefits of their innovation by a factor of three. The product of this clash of irrational estimates is a mismatch of nine to one between what innovators think consumers want and what consumers really want.
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How can companies overcome this disconnect? Gourville says the first step is to ask what kind of change they are asking of consumers. To do this, they need to figure out where their products fall in a matrix with four categories: easy sells, sure failures, long hauls, and smash hits. Each has a different ratio of product improvement to change required from the consumer. Come up with products that contain few product changes and require little behavioral changes and you will end up with an “easy sell.” If your new product has considerable product changes compared to the incumbents – make sure that they require little behavioral changes. By doing so you may end up with a “smash hit.”
The two basic strategies are Accepting Resistance and Minimizing Resistance. In cases where major behavior change is a given, companies can either be patient and wait for consumers to warm to the product, strive for 10x improvement so that buyers get past their apprehension, or try to eliminate the incumbent product. To minimize resistance, companies can make products that are behaviorally compatible with incumbent goods, seek out those who are not yet users of the existing product, or find true believers.
A high degree of product change combined with a high degree of behavioral change is much like the TIVO and those innovations are “long hauls.” Doomed out of the gate are those new products with little product changes that require a high degree of behavioral change.
Before setting out the three elements of his behavioral framework, Gourville first details its foundation in • Be Patient • Strive to 10X improvement • Eliminate the Old
Tackle Resistance by Minimizing Resistance • Make behaviorally compatible products • Seek out the unendowed • Find believers
Curse Of Innovation: People irrationally overvalue the benefits they currently possess relative to those they don’t have.
But that is not all! Not only are consumers overvaluing losses and existing benefits of entrenched products by a factor 3, sellers are also overvaluing the benefits of their innovations by a factor 3. That makes the mismatch between what innovators think consumers desire and what consumers really want 9 to one!
The results of this mapping will show businesses how they can manage the resistance to change
According to the author, Prof. John Gourville, there are a few psychological biases in decision making that need to be considered when using Everett Rogers’ “relative advantage” as a measure for successful product adoption
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The June issue of the Harvard Business Review has an interesting article describing some of the latest findings in the psychology of new-product adoption. In addition to transaction costs, learning costs, and obsolescence costs, John Gourville says the answer is to found in the operation of cognitive biases and the psychological costs these create when new products force consumers to change their behavior.

Innovation Cost

Economic Cost

Psychological Cost