MARKETING Session 10

Adoption and diffusion of innovations

AGENDA
Introduction Diffusion patterns
Shape Penetration

Drivers of diffusion
Adopters characteristics Innovation characteristics Innovators strategies

The Product Life Cycle

AGENDA
Introduction Diffusion patterns
Shape Penetration

Drivers of diffusion
Adopters characteristics Innovation characteristics Innovators strategies

The Product Life Cycle

Patterns of innovation diffusion

Many innovations are launched, but many of them fail and disappear. Once they are established, usually, innovations follow a typical diffusion path slow introduction, at first; then, faster development in terms of penetration and sales; slower growth, afterwards; finally, stable equilibrium. This pattern applies to most innovations, by and large, but it may varies substantially In many industries, especially high tech, diffusion times are shortening.

Mobile phone penetration in Italy

May 2005 (Source: STP)

100 90
79.6 82.5 84.0 91.2 88.0 88.7 89.6 87.7 86.1 86.3 75.9 78.7 79.9

POSSESSION IN FAMILY PERSONAL USE

80
69.9

76.5 66.0 68.4 69.9

74.1 73.7 64.1 56.2

70 60 50 40
31.3 38.4 30.5 24.6 17.4 11.3 14.2 47.0 56.1

64.8

52.0 44.3 38.5

30 20 10 0
0
18.3 15.1 6.1 7.9

24.3

5 AG .9 6 NO V. 96 M AG .9 7 NO V. 97 M AG .9 8 NO V. 98 M AG .9 9 NO V. 99 M AG .0 0 NO V. 00 M AG .0 1 NO V. 01 M AG .0 2 NO V. 02 M AG .0 3 NO V. 03 M AG .0 4 NO V. 04 M AG .0 5 M

NO

V. 9

Diffusion in different contexts Products and markets

Patterns of innovation diffusion

(Rogers)

Cumulative diffusion (stock)

Point diffusion (flow)

Technological innovation diffusion (chasm)

Chasm

Innovators
Technological enthusiasts Visionaries

The main market

Pragmatists Conservativess Skeptics

Discontinuous process - chiasm

Golder & Tellis,

2003

Diffusion Rates for New Information Technology

Time it took or is taking for these technologies to be adopted by 10 million customers Pager Telephone Cable TV Fax VCR Cellular phone PC CD-ROM Wireless Data
Source: Info Tech

41 years 38 years 25 years 22 years 9 years 9 years 7 years 6 years 6 years (est)

Adoption & Usage diffusion models

Adoption Diffusion model

Focus on rate or time of adoption S-shaped diffusion curve, speed of penetration and critical mass (and a two-step model of diffusion)

Usage Diffusion model

Focus on rate and variety of use Evolving nature of use (rate and variety), sustained continuous use (or disadoption), and technology outcome considerations (technology integration, perceived essentialness of technology, impact of technology, and user proneness to adopt new technologies).

AGENDA
Introduction Diffusion patterns
Shape Penetration

Drivers of diffusion
Adopters characteristics Innovation characteristics Innovators strategies

The Product Life Cycle

Innovation diffusion model

Bass Model, derived from epidemiological models Penetration is function of 3 different parameters innovation rate, imitation rate and size of the market at equilibrium. Penetration is effected, at the beginning, by external influence (firms pressure; innovation proneness on the part of adopters); afterwards, by internal influence (contagion word-of-mouth, imitation)

The Bass Diffusion Model for Durables

nt = p

Remaining Potential

Adopter Proportion * Remaining Potential

Imitation Effect

Innovation Effect

N = Eventual number of adopters # Adopters = n0 + n1 + + nt1 Remaining = Total Potential # Adopters Potential

nt = number of adopters at time t (Sales) p = coefficient of innovation (External influence) q = coefficient of imitation (Internal influence)

Diffusion processes - drivers

Drivers: external pressure and internal influence

External pressure : value discovery, design and delivery Internal influence : communication and imitation

External & internal influence

Bass model (1969)

Internal influence

Word-of-mouth

External influence

Mass media advertising

Impact of economic and cultural variables

q takeoff

Word-of-mouth

Impact of economic variables, ex. income (+) (Stremersch and Tellis, 2004).

Advertising

Impact of cultural and psycho variables, ex. uncertainty avoidance (-), self-realization (+), media consumption intensity (+), mobility (+), education (+) (Tellis et al. 2003).

Parameters of the Bass Model in Several Product Categories

Product/ Technology B B A A C C Innovation parameter (p) Imitation parameter (q) 0.231 0.146 0.185 0.143 0.534 0.378 0.421 0.128 0.435 0.357 0.797 0.281 L L L L H L H L H L H L

B&W TV 0.108 H Color TV 0.059 H Room Air conditioner 0.006 L Clothes dryers 0.009 L Ultrasound Imaging 0.000 L CD Player 0.055 H Cellular telephones 0.008 L Steam iron 0.031 H Oxygen Steel Furnace (US)0.002 L Microwave Oven 0.002 L Hybrid corn 0.000 L Home PC 0.121 H

A study by Sultan, Farley, and Lehmann in 1990 suggests an average value of 0.03 for p and an average value of 0.38 for q.

Penetrazione elettrodomestici - Italia

How to get p, q, and m?

P and Q by guessing by analogy- similar to previously introduced products M from stated intentions in survey ButStated intentions overstate actual choice behavior (Jamieson and Bass, 1989) How much to discount stated intention to acquire?

Stated Intentions and Actual Behavior

Jamieson and Bass

Probability of Purchase Increases with Stated Intention

Some Who Say They Wont, Do!

Some Who Say They Will, Dont

Stated Intentions Compared to Actual Purchase for 5 Consumer Durables and 5 Non-Durables 6 Months Later Actual Purchase Fractions for Each Product = k*Average Stated Choice Probability k varied a lot over the 10 products
Bootstrap Estimates over the 10 products

k= -.899+1.234 Afford +1.203 Avail Afford is the fraction stating

that the product is Very Affordable (top box)

Avail is the fraction that stated

that the product was ever seen in the stores where you shop

Use Equation For Forecast 6 Months After Avail Reaches Some Specified LevelLike 65%

Comparison of Actual with Forecast

Survey-Afford was 13 % (Very Affordable) Assume Avail = 65% After 1 Year (Available in Stores Where You Shop) Then k = .043 Stated intention from survey =0.32, And Predicted Penetration (Fraction of TV Homes) After 1 Year = .0137 Actual = .0121 Pretty Damn Good! ButNeed A Different Discount Factor For m For Longer Time Period (Post Note: Awareness was 63% After 1 Year)

AGENDA
Introduction Diffusion patterns
Shape Penetration

Drivers of diffusion
Adopters characteristics Innovation characteristics Innovators strategies

The Product Life Cycle

Adopter segments

Innovators
Early adopters

Early majority
Late majority

Laggards

Adopter segments

Drivers of diffusion/1 Adopters Characteristics

Individual attributes
socio-economic characteristics personality and psychological characteristics

Relational attributes
communication behavior Position within the social syistem

Early Age Education Status = + +

Late = -

Social Mobility
Size ref. group

+
+

Early

Late

Empaty
Dogmatism Rationality Intelligence Change attit.

+
+ + +

+ -

Risk proneness
Social partec.

+
+

Cosmopolitism

Italy
NorthW NorthE Centre South&Isl. Male Female 15-24 25-34 35-44 45-54 55-64 >64

Popul.ion

Cell own.s

SMS users

Italy
College
High School Primary Elementary Entr.Prof.

Popul.ion

Cell own.s

SMS users

27 18 20 35 48 52 14 18 17 15 14 22

28 18 20 34 52 48 18 22 21 16 12 11

30 19 20 31 53

6
25 39 30 3 9 2 15 15 17 10 22 7

8
30 45 17 4 10 2 19 18 14 12 13 8

10
36 48 6 5 9 3 22 19 9 19 4 10

Artisan 47 Manager 29 Employee 31 23 10 5 2 Blue Collar Housewife Student Retired Unemployed

VALS segments
http://www.strategicbusinessinsights.com/vals/ustypes.shtml

Innovators
Innovators are successful, sophisticated, take-charge people with high self-esteem. Because they have such abundant resources, they exhibit all three primary motivations in varying degrees. They are change leaders and are the most receptive to new ideas and technologies. Innovators are very active consumers, and their purchases reflect cultivated tastes for upscale, niche products and services. Image is important to Innovators, not as evidence of status or power but as an expression of their taste, independence, and personality. Innovators are among the established and emerging leaders in business and government, yet they continue to seek challenges. Their lives are characterized by variety. Their possessions and recreation reflect a cultivated taste for the finer things in life.

Diffusion and the adoption process

(stages)
First learns of new product, but unaware of benefits Searches for information about the new product

1. Awareness

2. Interest

3. Evaluation

Six Steps in the Consumer Adoption Process

Source: Rogers & Shoemaker, Communication of Innovations Source: Everett Rodgers, Diffusion of Innovations

Mentally considers whether the product will be useful Makes a trial purchase to discover whether it will be useful Decides to make regular use of the product Continues to seek confirmation of adoption decision

4. Trial

5. Adoption

6. Confirmation

AGENDA
Introduction Diffusion patterns
Shape Penetration

Drivers of diffusion
Adopters characteristics Innovation characteristics Innovators strategies

The Product Life Cycle

Drivers of diffusion/ 2 Innovation characteristics

Relative advantage Complexity Compatibility Divisibility/ trialability Communicability/ observability

+
C o m p a t i b.
Improvement Value Surplus

Borderline / Uncertainty

Problematic Innovation

Advantage +

AGENDA
Introduction Diffusion patterns
Shape Penetration

Drivers of diffusion
Adopters characteristics Innovation characteristics Innovators strategies

The Product Life Cycle

Drivers of diffusion/ 3 Entry strategies

Intensity/ invest. level (penetration, skimming) Entry speed/ timing (early, late) Breadth (broad, narrow) Development trajectory (sequential vs simultaneous path - waterfall vs sprinkler) Integration level (integr., disint.)

Pioneer Advantage/
The First Mover Advantage (PIMS)

Pioneering new markets is expensive and risky, but potentially very rewarding because market pioneers enjoy advantages based on early market entry. Pioneers are more likely to:
Have high market share, Survive longer Be market leaders in their product category

Evidences Against the Pioneer Advantage

PIMS data suffer from survival bias and self-reports bias; Most pioneers are market leaders for only 5 to 10 years; Early market leaders have a higher M/S, higher success rate, and stronger market leadership than pioneers (Golder
and Tellis 1993)

First entrants survived longer than second entrants only in successful market. But, in all markets second entrants survived as long as first entrants
(Glazer 1985; newspaper industry in Iowa from 1836 to 1976)

Lower M/S for first and second entrants; higher M/S for third and fourth entrants
(Lilien and Yoon 1990)

.(a lot)

Sources of Pioneer Advantage

Product-based Entry-Barriers
Economy of scale and learning can lead to lower costs for pioneers. Technological leadership can enable pioneers to consistently have better products than competitors. Cornering scarce assets with long-term agreements can keep them from late entrants.

Consumer-based Entry Barriers

When consumers successfully use the first product, they will continue to favor it because they know it works. The pioneer influences how consumers evaluate attributes and may become the standard for the product category. The pioneer can carve out the most profitable segment The pioneer may be able to lock-in consumers by creating high switching costs.

Sources of the Pioneers Advantage

Early users will recall the pioneers brand name if the product satisfies them. Establish the attributes the product class should possess. Capture more consumers because of aiming middle of the market. Customer inertia Producer advantages: economics of scale, technological leadership, patents, ownership of scare assets.

Forces Against the Pioneer Advantage

Free-rider effect: competitors introduces the same technology with lower costs. Technological discontinuities: late entrant uses superior technology to produce a better product before the pioneer. Shifts in consumers tastes: the late entrants adopt new positioning before pioneers. Incumbent inertia: pioneer is deterred from making the investments necessary to remain a market leader. Identification of ideal points: best product may become apparent only after the first product is widely introduced.

Marketing Strategies: Introduction Stage

Evidences of the pioneer advantage
6 months later 33%; On time 4%. The 2nd entrant obtained only 71% of the pioneers MS, and the 3rd entrant obtained only 58%. 19 out of 25 companies who were market leaders in 1923 were still the market leaders in 1983, 60 years later. In China:
sales growth; asset turnover Operational risk; ROI

The Comparative Success of Leaders and Followers

PRODUCT Jet Airliners Float glass X-Ray Scanner Office P.C. VCRs Diet Cola Instant Cameras Pocket Calculator Microwave Oven Plain Paper Copiers Fiber Optic Cable Video Games Players Disposable Diapers Web browser PDA MP3 music players

INNOVATOR De Havilland (Comet) Pilkington EMI Xerox Ampex/Sony R.C. Cola Polaroid Bowmar Raytheon Xerox Corning Atari Proctor & Gamble Netscape Psion, Apple Diamond Multimedia

FOLLOWER Boeing (707) Corning General Electric IBM Matsushita Coca Cola Kodak Texas Instruments Samsung Canon many companies Nintendo//Sony Kimberly-Clark Microsoft Palm Apple, Sony (&others)

WINNER Follower Leader Follower Follower Follower Follower Leader Follower Follower Not clear Leader Followers Leader Follower Follower Followers

AGENDA
Introduction Diffusion patterns
Shape Penetration

Drivers of diffusion
Innovation characteristics Adopters characteristics Innovators strategies

The Product Life Cycle

Sales and Profits Over the Products Life from Inception to Decline

Different patterns

Summary of Product Life-Cycle Characteristics, Objectives, and Strategies

Summary of Product Life-Cycle Characteristics, Objectives, and Strategies

Introduction Stage of PLC

Sales: Low Costs: High cost per customer Profits: Negative or low Customers: Innovators Competitors: Few

Marketing objective: Create product awareness and trial.

Introduction Stage of PLC

Marketing strategies: Product: Offer a basic product. Price: Use cost-plus pricing. Distribution: Build selective distribution. Advertising: Build product awareness among early adopters and dealers. Promotion: Use heavy promotion to entice product trial.

Growth Stage of PLC

Sales: Rapidly rising Costs: Average cost per customer Profits: Rising profits Customers: Early adopters Competitors: Growing number

Marketing objective: Maximize market share.

Growth Stage of PLC

Strategies: Product: Offer product extensions, service, warranty. Price: Price to penetrate the market. Distribution: Build intensive distribution. Advertising: Build awareness and interest in the mass market. Promotion: Reduce to take advantage of heavy consumer demand.

Maturity Stage of PLC

Sales: Peak sales Costs: Low cost per customer Profits: High profits Customers: Middle majority Competitors: Stable number beginning to decline

Marketing objective: Maximize profits while defending market share.

Maturity Stage of PLC

Strategies: Product: Diversify brand and models. Price: Match or best competitors. Distribution: Build more intensive distribution. Advertising: Stress brand differences and benefits. Promotion: Increase to encourage brand switching.

Decline Stage of PLC

Sales: Declining sales Costs: Low cost per customer Profits: Declining profits Customers: Laggards Competition: Declining number

Marketing objective: Reduce expenditures and milk the brand.

Decline Stage of PLC

Strategies: Product: Phase out weak items. Price: Cut price. Distribution: Go selectivephase out unprofitable outlets. Advertising: Reduce to level needed to retain hard-core loyals. Promotion: Reduce to minimal level.

Practical Problems of PLC

When used carefully, the PLC may help develop good marketing strategies. However, in practice, it is difficult to:
Forecast sales level, length of each stage, and shape of PLC. Develop marketing strategy because strategy is both a cause and result of the PLC.

Marketers should avoid blindly pushing products to next stage and instead seek ways to rescue products and growth sales.

Marketing Strategy

Product Mix Strategies Market penetration versus market skimming

High Quality Medium Low

Premium Penetra- Super Goods tion Bargain OverPricing Hit and Run High Average Quality Shoddy Goods Medium Price Bargain Cheap Goods Low

Percentuale delle vendite generata da nuovi prodotti sviluppati negli ultimi 5 anni
70%

Percentuale di contribuzione delle vendite

High Tech

Low Tech

Tutte

60% 50% 40% 30% 20% 10% 0% Ultime imprese Imprese di maggior successo Posizione delle imprese nella graduatoria di settore Imprese mediane Imprese migliori