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A lot of great new products fail — and companies often wonder why. Although the companies were careful to listen to their customers, the products still failed. This is not a rare occurrence. A recent study of almost 9,000 new products that achieved broad distribution at a national retailer revealed that just 40% of them were still sold three years later.1 (See “About the Research.â€) Some of these products did not create value for customers and deserved to fail. However, many would have created value if customers had adopted them. But customers could not, or did not, recognize their value.
While most companies focus on customer needs, they do not think hard enough about how customers decide what to purchase. We now have ample insight into how customers evaluate new products. Yet companies generally focus primarily on creating value — without enough regard to whether customers will recognize this value.
To decide what to buy, customers need to know what products are available and how their features vary. Whether you are an airline choosing which aircraft to purchase, a college graduate choosing your first car, or a parent buying diapers for your infant, there are only two ways you can collect this information. You can search, or you can infer. The inference process uses the information you can search for to guess the information that you cannot easily search for. We will start by discussing the search process before turning to the inference process.
In July 2012, United Airlines Inc. announced a large commercial aircraft purchase, with an agreement to purchase 150 Boeing-737 aircraft for $14.7 billion. The deal took a year just to negotiate,2 and before that, the team from United engaged in extensive research trying to understand the capabilities of different aircraft and the costs of operating and servicing them. Imposing structure and discipline on this search process is one of the primary roles of a procurement department. The length and intensity of the search process is a function of its cost, the importance of the decision, and the customer’s expertise.
For a customer, the perceived benefit of searching for a better solution may not be the same as the actual benefit, particularly in markets with little recent innovation.
Duncan Simester is the NTU Professor of Management Science and head of the marketing group at the MIT Sloan School of Management in Cambridge, Massachusetts.
1. E. Anderson, S. Lin, D. Simester, and C. Tucker, “Harbingers of Failure,†Journal of Marketing Research 52, no. 5 (October 2015): 580-592.
2. C. Isidore, “Boeing Wins $14.7 Billion Jet Order From United,†July 12, 2012, http://money.cnn.com.
3. Y.E. Moon and K. Herman, “Aqualisa Quartz: Simply a Better Shower,†Harvard Business School case no. 9-502-030 (Boston, Massachusetts: Harvard Business School Publishing, 2002, revised 2006).
4. See L.P. Banville, “Taxi Cab Accidents in New York: 1999–2014,†December 10, 2014, http://banvillelaw.com; and New York City Taxi & Limousine Commission, “2014 Taxicab Factbook,†www.nyc.gov.
5. S. Moorthy, B.T. Ratchford, and D. Talukdar, “Consumer Information Search Revisited: Theory and Empirical Analysis,†Journal of Consumer Research 23, no. 4 (March 1997): 263-277.
6. J. Pepin, “Burger Meister Ray Kroc,†Time, Dec. 7, 1998.
7. See E.H. Adelson, “Checkershadow Illusion,†1995, http://persci.mit.edu.
8. For another surprising example of these visual effects, see R.B. Lotto and D. Purves, “The Effects of Color on Brightness,†Nature Neuroscience 2, no. 11 (November 1999): 1010-1014.
9. Prominent studies of the signaling role of the brand include T. Erdem and J. Swait, “Brand Equity as a Signaling Phenomenon,†Journal of Consumer Psychology 7, no. 2 (April 1998): 131-157; and B. Wernerfelt, “Umbrella Branding as a Signal of New Product Quality: An Example of Signaling by Posting a Bond,†Rand Journal of Economics 19, no. 3 (autumn 1988): 458-466.
10. This second signaling role of the brand is particularly important if consumption is conspicuous. For example, when we wear a Rolex watch, drive a BMW vehicle, carry a Louis Vuitton bag, or talk on an iPhone, our consumption is conspicuous to others. In these settings, consumers may enlist brands to convey signals about themselves. Wearing a Rolex watch signals success and perhaps good taste — personal characteristics that are desirable to communicate, but objectionable to mention explicitly. See Y.J. Han, J.C. Nunes, and X. Drèze, “Signaling Status With Luxury Goods: The Role of Brand Prominence,†Journal of Marketing 74, no. 4 (July 2010): 15-30.
11. Rajiv Lal and Miklos Sarvary draw a distinction between what they term digital attributes, which can be searched online, and nondigital attributes, which cannot. See R. Lal and M. Sarvary, “When and How Is the Internet Likely to Decrease Price Competition,†Marketing Science 18, no. 4 (November 1999): 485-503.
12. F. Zettelmeyer, F.S. Morton, and J. Silva-Risso, “How the Internet Lowers Prices: Evidence From Matched Survey and Automobile Transaction Data,†Journal of Marketing Research 43, no. 2 (May 2006): 168-181.
13. C. Tice, “Hard Rock Cafe Hits Some Sour Notes But Keeps Rolling,†March 2, 2010, www.cbsnews.com.
14. John G. Lynch Jr. and Dan Ariely demonstrated this point in a clever study of wine markets. They found that making it easier to obtain information about quality reduces price sensitivity for differentiated wines. However, when the Internet revealed that the wines were undifferentiated, price sensitivity among customers increased. See J.G. Lynch Jr. and D. Ariely, “Wine Online: Search Costs Affect Competition on Price, Quality, and Distribution,†Marketing Science 19, no. 1 (February 2000): 83-103.
15. B. Ratchford, D. Talukdar, and M.S. Lee, “The Impact of the Internet on Consumers’ Use of Information Sources for Automobiles: A Re-Inquiry,†Journal of Consumer Research 34, no. 1 (June 2007): 111-119.
i. Anderson et al., “Harbingers of Failure.â€
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