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The corporate universe is very competitive, with companies forced to either innovate or fall behind their competitors. Even when businesses spend billions of dollars investing in new products, the odds are still stacked against them. For example, a recent study found between 40% and 90% of new products fail. Companies looking to sell packaged goods in the U.S. introduced to consumers 30,000 new items each year and the failure rate was at least 70%. Most products fail to stay on the shelves in stores for more than 12 months. The failure rate has remained consistent for more than two decades. According to another study, even companies who gained a first-mover advantage were eventually pushed out of the category.
The question that experts continue to examine is why good products fail to see success. After all, a product that offers a superior benefit to the end-user should be embraced by consumers who are willing to spend money. The answer to this question could be found in psychology. New products may be at a disadvantage as they require consumers to change some forms of behaviour and that comes with a cost. Consider for example a new smartphone that is more advanced and something a consumer wants but requires the consumer to pay a penalty when switching from one service provider to another. A cost can also come in the form of time if a consumer needs to educate themselves and learn how to use new technologies.
It may be easy for a company to quantify any of these costs, but it is difficult, if not impossible, to quantify the psychological cost associated with switching a cell phone provider or learning a new technology. Consumers are guilty of psychologically acting irrationally because they overvalue the benefits of a product they currently use. Companies also assume that consumers will by default embrace new products that offer incremental value and this alone is reasonable enough for them to buy a product. Communications scholar Everett Rogers hypothesised this theory in the 1960s and called it the concept of ‘relative advantage’ which argued it was the most important driver of consumers buying new products. The theory behind the concept has a major flaw as it, once again, ignores psychological biases that affect decision making.
In 2002, psychologist Daniel Kahneman explored why and when consumers distance themselves from rational economic behaviour. Kahneman and fellow psychologist Amos Tversky found that humans respond to alternatives in four different ways. First, people tend to value how attractive a new item is based on its subjective or perceived value. Second, consumers consider a new product relative to one they already own or are familiar with. Third, consumers look at improvements in a product relative to a similar product they already own. Finally, and most importantly, deteriorating features have a much larger impact on people compared to a similar-sized improvement.
These traits have been for the most part validated in multiple surveys and studies. One study consisted of people being told they can accept a wager in which there is a 50% chance of winning $100 and an equal chance of losing the same amount of money. Needless to say that few would want to partake in an offer which amounts to a coin toss as they need to be at an advantage. The study then changed the parameters by giving the participants a slight edge in winning $100 over losing $100. It was not until the likelihood of winning $100 was two to three times better than losing $100 before the majority of participants felt comfortable enough to enter a wager.
This loss aversion prompts people to value products they already own more than those they do not. Behaviour economist Richard Thaler referred to this as the ‘endowment effect’. Thaler conducted an experiment by giving a group of people coffee mugs and asking what amount of money (from 25 cents to $9.25) they would sell their mugs for. Another group was asked if they would rather receive the coffee mug or cash. The ‘Sellers’ of the mugs valued their cups at $7.12 on average in the first trial while the ‘Buyers’ were willing to pay on average just $3.12. In a follow-up trial the ‘Sellers’ valued their cups at $7.00 while ‘Buyers’ increased their willingness to buy the mugs on average at $3.50.
Thaler's findings were consistent with a similar study from economist Jack Knetsch who found 90% of participants considered giving up what they already had as a painful loss. The data was compiled from a study consisting of three groups of students. Group one participants were given a choice of receiving a coffee mug or a chocolate bar which had a similar price point in stores.The choices were nearly split evenly, with 56% of students opting for a mug and 44% for a chocolate bar.
Group two had no choice in the matter and were given a coffee mug, and the third group were similarly given just a chocolate bar. At that point, group two participants were asked if they want to trade their coffee mug for a chocolate bar and group three were given a similar option of trading their chocolate bar for a coffee mug. Surprisingly, only 11% of group two participants wanted to trade for a chocolate bar and only 10% of group three participants wanted a coffee mug instead. The researchers of the study felt the outcomes were compelling enough to conclude that a consumer feels a painful loss when they are giving up a product they have in their hands. The most notable takeaway from the psychological experiments is how oblivious most people are to their behaviours. Even when presented with evidence of irrationality, people acted not only shocked but slightly defensive. These behaviour traits have proven to be consistent across all experiments.
Look at the following statements (Questions 1-4) and the list of people below. Match each statement or deed with the correct person or people, A-C. Write the correct letter, A-C, in boxes 1-4 on your answer sheet.
NB You may use any letter more than once.
| List of People A Richard Thaler B Everett Rogers C Kahneman and Tversky |
Companies treat all new products with improvements as more likely to be adopted by consumers than older ones.
Worsened properties of products will influence customers more than equivalent enhanced ones.
Used a special term for people valuing things they possess more than things they may receive.
Created an experiment to measure the different value people ascribed to items they owned versus ones they did not.
Do the following statements agree with the information given in Reading Passage 3? In boxes 5-9 on your answer sheet, write
TRUE If the statement agrees with the information
FALSE If the statement contradicts the information
NOT GIVEN If there is no information on this
According to Kahneman and Tversky, the value of an item is objective to the consumers.
According to Kahneman and Tversky, people tend to compare a new item to the ones they know well.
The coffee cup and chocolate bar had a small difference in value to the participants in the first group of Knetsch's study.
Participants in the second group of Knetsch's experiment would be offered chocolate after the experiment.
According to the author, the majority of people are aware of their purchasing biases.
Choose the correct letter, A, B, C or D. Write your answers in boxes 10-13 on your answer sheet.
Even if a new product is an improvement on what is currently offered,
The key weakness of a new product, from a consumer's perspective, may relate to
What view does the writer express from Thaler's experiment?
What can we know from the results of Knetsch's experiment?
The corporate universe is very competitive, with companies forced to either innovate or fall behind their competitors. Even when businesses spend billions of dollars investing in new products, the odds are still stacked against them. For example, a recent study found between 40% and 90% of new products fail. Companies looking to sell packaged goods in the U.S. introduced to consumers 30,000 new items each year and the failure rate was at least 70%. Most products fail to stay on the shelves in stores for more than 12 months. The failure rate has remained consistent for more than two decades. According to another study, even companies who gained a first-mover advantage were eventually pushed out of the category.
The question that experts continue to examine is why good products fail to see success. After all, a product that offers a superior benefit to the end-user should be embraced by consumers who are willing to spend money. The answer to this question could be found in psychology. New products may be at a disadvantage as they require consumers to change some forms of behaviour and that comes with a cost. Consider for example a new smartphone that is more advanced and something a consumer wants but requires the consumer to pay a penalty when switching from one service provider to another. A cost can also come in the form of time if a consumer needs to educate themselves and learn how to use new technologies.
It may be easy for a company to quantify any of these costs, but it is difficult, if not impossible, to quantify the psychological cost associated with switching a cell phone provider or learning a new technology. Consumers are guilty of psychologically acting irrationally because they overvalue the benefits of a product they currently use. Companies also assume that consumers will by default embrace new products that offer incremental value and this alone is reasonable enough for them to buy a product. Communications scholar Everett Rogers hypothesised this theory in the 1960s and called it the concept of ‘relative advantage’ which argued it was the most important driver of consumers buying new products. The theory behind the concept has a major flaw as it, once again, ignores psychological biases that affect decision making.
In 2002, psychologist Daniel Kahneman explored why and when consumers distance themselves from rational economic behaviour. Kahneman and fellow psychologist Amos Tversky found that humans respond to alternatives in four different ways. First, people tend to value how attractive a new item is based on its subjective or perceived value. Second, consumers consider a new product relative to one they already own or are familiar with. Third, consumers look at improvements in a product relative to a similar product they already own. Finally, and most importantly, deteriorating features have a much larger impact on people compared to a similar-sized improvement.
These traits have been for the most part validated in multiple surveys and studies. One study consisted of people being told they can accept a wager in which there is a 50% chance of winning $100 and an equal chance of losing the same amount of money. Needless to say that few would want to partake in an offer which amounts to a coin toss as they need to be at an advantage. The study then changed the parameters by giving the participants a slight edge in winning $100 over losing $100. It was not until the likelihood of winning $100 was two to three times better than losing $100 before the majority of participants felt comfortable enough to enter a wager.
This loss aversion prompts people to value products they already own more than those they do not. Behaviour economist Richard Thaler referred to this as the ‘endowment effect’. Thaler conducted an experiment by giving a group of people coffee mugs and asking what amount of money (from 25 cents to $9.25) they would sell their mugs for. Another group was asked if they would rather receive the coffee mug or cash. The ‘Sellers’ of the mugs valued their cups at $7.12 on average in the first trial while the ‘Buyers’ were willing to pay on average just $3.12. In a follow-up trial the ‘Sellers’ valued their cups at $7.00 while ‘Buyers’ increased their willingness to buy the mugs on average at $3.50.
Thaler's findings were consistent with a similar study from economist Jack Knetsch who found 90% of participants considered giving up what they already had as a painful loss. The data was compiled from a study consisting of three groups of students. Group one participants were given a choice of receiving a coffee mug or a chocolate bar which had a similar price point in stores.The choices were nearly split evenly, with 56% of students opting for a mug and 44% for a chocolate bar.
Group two had no choice in the matter and were given a coffee mug, and the third group were similarly given just a chocolate bar. At that point, group two participants were asked if they want to trade their coffee mug for a chocolate bar and group three were given a similar option of trading their chocolate bar for a coffee mug. Surprisingly, only 11% of group two participants wanted to trade for a chocolate bar and only 10% of group three participants wanted a coffee mug instead. The researchers of the study felt the outcomes were compelling enough to conclude that a consumer feels a painful loss when they are giving up a product they have in their hands. The most notable takeaway from the psychological experiments is how oblivious most people are to their behaviours. Even when presented with evidence of irrationality, people acted not only shocked but slightly defensive. These behaviour traits have proven to be consistent across all experiments.