diffusion of innovation
In a tech-driven business world, the most difficult part is not necessarily to build something but to build something that people want.
And also there, the question of who is the right target for that specific timeframe of product development is critical to make sure to have a proper balance between focus and innovation to move to the next phase of distribution.
Indeeed, in business it’s all about being able to build something valuable for a niche, and move to adjacent niches from there.
Easier said than done.
That’s why, one of the most important mental models in the technological world is the “diffusion of innovation” via the technology adoption curve!
Sociologist E.M. Rogers developed the Diffusion of Innovation Theory in 1962, premised on the idea that with enough time, tech products are adopted by wider society as a whole.
People adopting those technologies are divided according to their psychologic profiles into five groups: innovators, early adopters, early majority, late majority, and laggards.
Before we get to that below a visual representation of all I’ll cover in this issue!
Understanding the Diffusion of Innovation Theory
The Diffusion of Innovation Theory was developed by sociologist E.M Rogers in 1962.
The basic premise of Rogers’ theory is that people spread or diffuse ideas and products through a population.
With enough time, they are adopted by wider society as a whole.
Indeed, adoption in this context means that a consumer does something they hadn’t done previously.
Businesses and marketing departments should be most interested in diffusion, which results in consumers purchasing a new product and influencing wider society to do the same.
For that process to play out in reality, the right type of consumer must be targeted. The next section will look at how this might be accomplished.
Categories of Consumers in the Diffusion of Innovation Theory
Individual consumers within a social system can be classified into five distinct groups according to their propensity for innovation.
1. Innovators
Innovators are consumers who are the first to buy a new product after it enters the market.
They come from higher socioeconomic classes and have the liquidity required for high-risk tolerance.
They are also very social and have many close contacts with other innovators.
2. Early adopters
Early adopters are similar to innovators in their degree of liquidity, education level, and social status.
They are generally more opinionated about their life choices and enjoy a degree of leadership in this area.
However, their risk tolerance is lower, and as a result, they are more discerning about the type of products they adopt.
3. Early majority
The early majority represents consumers who adopt a new product or technology after a sufficient amount of time has passed.
They are not as vocal about their life choices as the early adopters, but their opinions still carry weight in wider society.
4. Late majority
The late majority of consumers approach a new product with skepticism because of their low liquidity and social status.
They will generally not adopt a new product until the majority of the population of consumers has done so.
5. Laggards
Laggards are the last consumers to adopt a new product.
They tend to be found in older demographics who have traditional values opposed to change.
They also have small social circles and have little interest in voicing their opinions.
Using the Diffusion of Innovation Theory in marketing
For marketing departm’ efforts are best served by focusing on the early adopters and early majority.
While the temptation may be to market to innovators, businesses should not confuse an innovator’s high tolerance for risk with the popularity of their products.
Efforts are best served by focusing on the early adopters and early majority.
Consumers in these segments represent a sweet spot for marketers, with their high disposable income, sociability, and product discernment.
For these reasons, these consumers create momentum that helps drive a product to its tipping point - or the point at which it becomes widely adopted.
Tesla Case Study
A great way to understand the diffusion of innovation is the evolution of the Tesla business model.
In short, when Tesla entered the market, it didn't do it by trying to build an EV that could be distributed to the masses.
Indeed, Tesla was not the first to try to build a successful EV vehicle.
In the mid-late 1990s, General Motors built a car called EV1.
The car was supposed to target right on a more significant segment of the market.
This made sense for General Motors because, as an established automaker, it made sense to look into the development of an electric vehicle, only if this would go after a large market.
Yet, this turned out to be a complete failure.
That's the core difference between a startup and an incumbent.
When launching new products, an incumbent like General Motors tries to go after large market segments immediately (targeting the late majority).
A startup with constrained resources must do the opposite.
A company like Tesla, with limited funding, had to figure out how to niche down the market as much as possible to showcase the technology without going bankrupt.
To Tesla in the early days, it didn't matter how small it was the niche it was going to tackle.
What mattered was the ability to showcase the technology at first.
This is a core difference, as whereas new entrants develop markets by starting from tiny niches, incumbents try to launch markets by starting from the masses!
The former approach creates options to scale, where failure is cheap and bearable.
The latter creates a scenario where failure gets so expensive that if the product doesn't reach the masses, it will be withdrawn, and progress will be stopped for years!
Therefore, Tesla used the Roadster as a gateway to the car industry, targeting a tiny market segment made of innovators who supported Tesla's mission.
Over time, Tesla produced other EVs in parallel to address increasingly large market segments.
It took Tesla fifteen years to start working toward mass manufacturing the Model 3.
And this strategy is still ongoing.
The essence of scale
Thus, a few critical lessons work remembering here:
Market Size
Whereas incumbents try to tackle mass markets right off the bat.
New entrants, with limited funding and constrained resources, niche down to the point of tackling what seems to be an interesting microniche.
Over time, that microniche can turn into a giant industry!
Cost of failing
The incumbent comes up with a strategy where failure gets extremely expensive and failed launch turns into an unsuccessful product for years.
A new entrant instead niches down as much as possible to make failing fast and cheap.
In the case of General Motors, the failure of the EV1 was such that still, in the 2020s, the company had to recover and compete in full in the EV industry.
Options to scale
A key thing to understand is that you don't need to go after an extensive market when launching new products.
Tackling a large market requires economies of scale.
Achieving economies of scale requires a foundational product that has been iterated many times over at various production scales.
This process takes years to build up.
Thus, it would be best to look for small opportunities that create options when launching a whole new product to scale.
You can always decide to try to make the product work at a larger scale once it works at a small scale.
The opposite is not true.
When you try to make a product work on a large scale, failure is almost guaranteed.
There is one exception to the rule, and that is Apple's iPhone. The rest is mainly guaranteed failure.
Strategy vs. product launches
When building a new market, you must shift your mindset from product vs. strategy.
The product launch mindset is that you want to see the product succeed at scale.
Instead, a strategy mindset requires understanding that for a product to be successful at scale, it needs to be rolled out through various stages of iterations, at various scales, for years. In some cases, it might take decades.
In other words, today's microniches are tomorrow's mass markets!
To succeed, you want to limit your options today to create options to scale tomorrow!
Key Highlights
Diffusion of Innovation Theory: Developed by sociologist E.M Rogers in 1962, this theory explores how ideas and products spread through a population over time. The ultimate goal is for these ideas or products to be adopted by society as a whole.
Consumer Adoption: Adoption in this context refers to consumers taking up a new behavior or purchasing a new product. This process is crucial for businesses and marketers, as they want to influence consumers to adopt new products and contribute to their widespread acceptance.
Categories of Consumers: The theory categorizes consumers into five groups based on their willingness to adopt new ideas or products:
Innovators: First to adopt, often with high risk tolerance and strong social networks.
Early Adopters: Similar to innovators but more discerning and influential.
Early Majority: Adopt after a new idea or product gains some traction.
Late Majority: Skeptical and adopt only when most have already done so.
Laggards: Last to adopt, often due to traditional values and limited social circles.
Marketing Implications: Marketing efforts are best directed towards early adopters and early majority, as they have high disposable income, sociability, and influence. These segments can create momentum leading to a product's widespread adoption.
Tesla Case Study: Tesla's approach to the market exemplifies the diffusion of innovation theory. Tesla started by targeting a small niche (innovators) with their Roadster to showcase their technology. Over time, they expanded to larger market segments.
Startup vs. Incumbent Strategy: Startups, with limited resources, should initially target small niches to showcase their technology and iterate gradually. Incumbents may try to target large markets from the beginning, making failure expensive.
Options to Scale: New products should be tested in smaller niches before attempting mass-market adoption. Scaling requires iterative development and takes time, while trying to scale prematurely often leads to failure.
Mindset Shift: To succeed in building new markets, a strategy mindset is crucial. Understanding that products need iterations and scaling over time is essential for long-term success.
Real-World Case Studies
Tesla
Segment Targeted: Innovators
Product: Tesla Roadster
Key Elements: High-performance, limited production, luxury sports car
Outcome: Established brand credibility and showcased technology
Segment Targeted: Early Adopters
Product: Model S
Key Elements: High-end electric sedan, long range, advanced features
Outcome: Built brand recognition, attracted premium customers
Segment Targeted: Early Majority
Product: Model 3
Key Elements: Affordable electric sedan, mass production, improved technology
Outcome: Mass-market adoption, significant sales growth
Apple
Segment Targeted: Innovators
Product: Macintosh
Key Elements: Revolutionary GUI, premium pricing, unique design
Outcome: Established Apple as an innovator in personal computing
Segment Targeted: Early Adopters
Product: iPod
Key Elements: Portable music player, sleek design, iTunes integration
Outcome: Dominated the portable music player market
Segment Targeted: Early Majority
Product: iPhone
Key Elements: Smartphone with touch interface, App Store ecosystem
Outcome: Revolutionized mobile industry, high market penetration
Google
Segment Targeted: Innovators
Product: Google Search
Key Elements: Superior search algorithm, ad-free initially
Outcome: Rapid adoption among tech-savvy users
Segment Targeted: Early Adopters
Product: Google Ads
Key Elements: Pay-per-click advertising model, targeted ads
Outcome: Became primary revenue source, widespread adoption among businesses
Segment Targeted: Early Majority
Product: Google Workspace
Key Elements: Cloud-based productivity tools, seamless integration
Outcome: Significant penetration in enterprise productivity market
Netflix
Segment Targeted: Innovators
Product: DVD Rental by Mail
Key Elements: Subscription model, convenience, no late fees
Outcome: Established initial customer base, disrupted video rental industry
Segment Targeted: Early Adopters
Product: Streaming Service
Key Elements: Online streaming, vast content library
Outcome: Rapid growth, shifted focus to digital streaming
Segment Targeted: Early Majority
Product: Original Content
Key Elements: High-quality original shows and movies
Outcome: Became a major player in content production, subscriber growth
Amazon
Segment Targeted: Innovators
Product: Online Bookstore
Key Elements: Vast selection, convenience, competitive pricing
Outcome: Established as a leading online retailer
Segment Targeted: Early Adopters
Product: Amazon Prime
Key Elements: Subscription service, free shipping, exclusive content
Outcome: High customer retention, expanded to broader product offerings
Segment Targeted: Early Majority
Product: Amazon Web Services (AWS)
Key Elements: Cloud computing services, scalable infrastructure
Outcome: Dominated cloud services market, high revenue growth
Facebook
Segment Targeted: Innovators
Product: Facebook (TheFacebook)
Key Elements: College network, exclusive membership
Outcome: Rapid growth among college students
Segment Targeted: Early Adopters
Product: Expanded Membership
Key Elements: Opening to high schools, eventually public
Outcome: Explosive user base growth
Segment Targeted: Early Majority
Product: Mobile App
Key Elements: Mobile-first experience, real-time updates
Outcome: Dominated mobile social networking
Microsoft
Segment Targeted: Innovators
Product: Windows OS
Key Elements: Graphical user interface, improved usability
Outcome: Became dominant operating system
Segment Targeted: Early Adopters
Product: Office Suite
Key Elements: Integrated productivity tools, business focus
Outcome: Became standard software for business productivity
Segment Targeted: Early Majority
Product: Azure
Key Elements: Cloud computing platform, enterprise solutions
Outcome: Significant share in cloud services market
Uber
Segment Targeted: Innovators
Product: UberBLACK
Key Elements: Luxury ride service, app-based booking
Outcome: Established brand, showcased convenience
Segment Targeted: Early Adopters
Product: UberX
Key Elements: Affordable ride-sharing, expanded driver base
Outcome: Rapid market expansion, high user adoption
Segment Targeted: Early Majority
Product: UberEATS
Key Elements: Food delivery service, app integration
Outcome: Expanded service offerings, increased revenue
Airbnb
Segment Targeted: Innovators
Product: Airbed & Breakfast
Key Elements: Short-term rentals in private homes, unique experiences
Outcome: Created initial user base, validated concept
Segment Targeted: Early Adopters
Product: Expanded Listings
Key Elements: More property types, increased inventory
Outcome: Significant growth, market penetration
Segment Targeted: Early Majority
Product: Airbnb Experiences
Key Elements: Curated local activities, integrated platform
Outcome: Enhanced user engagement, diversified revenue streams
Spotify
Segment Targeted: Innovators
Product: Free Streaming
Key Elements: Ad-supported, large music library
Outcome: Built initial user base, validated streaming model
Segment Targeted: Early Adopters
Product: Premium Subscription
Key Elements: Ad-free, offline access, higher audio quality
Outcome: High conversion to paid subscribers, increased revenue
Segment Targeted: Early Majority
Product: Personalized Playlists
Key Elements: Curated playlists, Discover Weekly
Outcome: Enhanced user experience, retention, and engagement
Slack
Segment Targeted: Innovators
Product: Free Messaging Service
Key Elements: Team collaboration, integrations with other tools
Outcome: Built user base among tech-savvy teams
Segment Targeted: Early Adopters
Product: Premium Features
Key Elements: Enhanced security, more integrations, analytics
Outcome: High adoption in enterprises, increased revenue
Segment Targeted: Early Majority
Product: Enterprise Grid
Key Elements: Large-scale deployments, enterprise-level features
Outcome: Significant penetration in large organizations, high user retention
Dropbox
Segment Targeted: Innovators
Product: Free Cloud Storage
Key Elements: Easy file sharing, seamless sync
Outcome: Rapid user growth, validated cloud storage model
Segment Targeted: Early Adopters
Product: Paid Plans
Key Elements: Increased storage, advanced features
Outcome: High conversion to paid subscribers, increased revenue
Segment Targeted: Early Majority
Product: Dropbox Business
Key Elements: Team collaboration, advanced security features
Outcome: Significant market share in business cloud storage
Warby Parker
Segment Targeted: Innovators
Product: Online Glasses Retailer
Key Elements: Home try-on program, affordable pricing
Outcome: Disrupted traditional eyewear market, built strong brand
Segment Targeted: Early Adopters
Product: Retail Stores
Key Elements: Physical presence, enhanced customer experience
Outcome: Expanded customer base, improved brand loyalty
Segment Targeted: Early Majority
Product: Vision Care Services
Key Elements: Eye exams, prescription services
Outcome: Comprehensive eye care solutions, increased market penetration
TikTok
Segment Targeted: Innovators
Product: Short-Form Video Platform
Key Elements: Easy video creation, viral challenges
Outcome: Rapid user adoption, strong engagement
Segment Targeted: Early Adopters
Product: Influencer Collaborations
Key Elements: Partnerships with popular creators
Outcome: Increased content quality, expanded user base
Segment Targeted: Early Majority
Product: Monetization Features
Key Elements: Ads, in-app purchases, brand partnerships
Outcome: High revenue growth, significant market presence
Laggards
Nokia
Segment Targeted: Laggards
Product: Feature Phones
Key Elements: Simple, reliable, long battery life
Outcome: Continued sales among consumers resistant to smartphones
Kodak
Segment Targeted: Laggards
Product: Disposable Cameras
Key Elements: Inexpensive, easy-to-use, physical prints
Outcome: Maintained market presence among non-digital camera users
BlackBerry
Segment Targeted: Laggards
Product: Physical Keyboard Smartphones
Key Elements: Tactile typing experience, secure email
Outcome: Retained a niche market of users resistant to touchscreen phones
Microsoft
Segment Targeted: Laggards
Product: Windows XP
Key Elements: Continued support and updates for an outdated OS
Outcome: Extended life cycle of an older product for resistant users
Toyota
Segment Targeted: Laggards
Product: Hybrid Cars (Toyota Prius)
Key Elements: Familiar driving experience, incremental innovation
Outcome: Slowly increased hybrid adoption among traditional car buyers
Panasonic
Segment Targeted: Laggards
Product: VHS Tape Players
Key Elements: Support for existing media libraries, reliability
Outcome: Sustained sales among users reluctant to switch to DVDs
Samsung
Segment Targeted: Laggards
Product: Flip Phones
Key Elements: Simple functionality, durable design
Outcome: Continued market presence among users avoiding modern smartphones
IBM
Segment Targeted: Laggards
Product: Mainframe Computers
Key Elements: Stability, reliability, long-term support
Outcome: Maintained dominance in industries resistant to change
Amazon
Segment Targeted: Laggards
Product: Printed Books
Key Elements: Extensive selection, familiarity, ease of reading
Outcome: Continued strong sales among consumers preferring physical books
Canon
Segment Targeted: Laggards
Product: Film Cameras
Key Elements: High-quality images, traditional photography experience
Outcome: Sustained niche market of film photography enthusiasts
Ciao!
With ♥️ Gennaro, FourWeekMBA
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