Companies that introduce new products to the market have a better chance of success than those that do not. But this alone won’t guarantee success. Despite a dismal record for “successful” new product introductions (40-90 percent fail), it is clear that to succeed a company must be able to predict customer behavior. Might this, then, be why innovative products fail despite extraordinary benefits?

The quest for the answer has stimulated no small amount of study to determine the minds of buyer and seller. Among those who have delivered practical solutions to this vexing problem is psychologist Daniel Kahneman, whose work on the psychology of economics won him the Nobel Prize in 2002. What he discovered is simply this: New products typically ask of consumers a change in behavior that entails some costs. They may be reconfigured costs such as those associated with the addition of memory to an off-the-shelf computer, or learning costs such as those attending a new computer operating system, or gaining familiarity with the GPS system you ordered with your new car. These are called “economic switching costs,” and they are common to the adoption of most innovative new products.

What product companies fail to consider carefully, according to Dr. Kahneman’s model, are the psychological costs associated with behavioral change. Products often fail because of psychological biases that exist in both buyer and seller—“people irrationally overvalue benefits they currently possess relative to those they don’t.” The effect: buyers tend to value the benefits of products they own over the benefits of new ones, and sellers tend to value the benefits of new products they’ve created over existing alternatives. The result: customers reject new products even though they may be better, and companies with new products don’t know how to anticipate their failure in the market.

The Math
The idea is brilliant, and simple. Further, Kahneman’s Model reduces the solution to math. Innovators are a sticky breed. They tend to see their creations as centric models of all that is right within the product category, convinced of the need for them and aware of the shortfalls of current alternatives. In effect, they begin to rely entirely on their own view of things. These visionaries have seen the future, and it is of their own making, or so it seems.
The model postulates that all buying decisions are a matter of gains and losses. That is, consumers display characteristic behavior in making choices of new products in the following ways:

First, they view the attractiveness of alternatives to what they already have by subjective or perceived value and not by objective or actual value.

Second, they judge the value of alternatives against a reference point. In other words, it is hard to argue against one’s own experience.

Third, improvements, as measured against this benchmark, are treated as gains, and shortcomings as losses.

Finally, losses have a far greater weighting than comparable gains by a factor of three to one. Kahneman calls it “loss aversion.”

Simply, consumers value as much greater what they already have than what they don’t have but could obtain. This is called the “endowment effect.” We are loathe to give up shoes that are comfortable, even if a little worn, for a new pair yet unproven.

Further research indicates that consumers, like innovators, are also “sticky” about the things they have. When given a choice between two items — a pen and a bottle of water, for example — the choice tends to be evenly split. But when asked to trade one for the other, 90 pecent will usually keep what they already have. This, says behavioral economist Richard Thaler, is called the “status quo bias.”

The same applies to product companies or innovators. Consumers overvalue the existing product’s benefits by three to one. Product innovators, likewise, overvalue the new product’s benefits by the same three to one ratio. The result, according to research, is a mismatch of nine to one (9x) between what product companies think consumers desire and what they really want.

Practical Tools
How do you get the right product to a consumer ready to trade in his old product? How do you get the customer right? To this question Kahneman offers a behavioral framework that balances product and behavior changes. It’s a simple system of trade-offs that works magically to stem the tide of new product failures, as depicted in the model below. “Companies create value through product change, but they capture that value best by minimizing behavioral change. A SMASH HIT, in his parlance, requires nothing less.



There is more to the model, as prepared by Dr. Kahneman, and additional research of practical promise. But no matter the lining of opportunity, predicting customer behavior is always the silver mining all organizations must do. An exciting new product to watch is mobile text advertising—the fastest growing ad medium today.

Frank J. Rich is founder and CEO of Encore Prist International, an organizational development company that helps individuals and organizations reach their full potential through the practice of effective business fundamentals. You may reach him at mobile.encoreprist.com.