Marketing Strategies Considering Network Effects and Diffusion of Innovation
Marketing students will be familiar with the law of diffusion of innovation. The law summarizes the aggregate behavior of potential buyers over a population and sorts them into five groups shown below.
The “takeaway” of the law of diffusion of innovation is that the first two groups on the diagram above (the “Innovators” and the “Early Adopters”) are the only groups willing to accept the risk of purchasing a product without second hand approval of the product; the other groups need to see a friend try it first before they can accept it as worthwhile. This can be explained using a behavior-cascade model, if we change it a little. Based on their personalities, personal history, and socioeconomic positions different people have higher or lower thresholds at which they are willing to accept a new product or behavior – Innovators and Early Adopters have very small, if not 0, thresholds, whereas “Laggards” have very high thresholds. Innovations and behaviors travel from the left to the right side of the curve as the product or behavior spreads through the population.
People move between these groups, but certain generalizations can be made about the groups and the distribution of the population along this curve is roughly the same at all times. Innovators and Early Adopters tend to be younger, more affluent – thus more willing to take financial risks such as buying a potentially useless product – and better educated. Start up companies are particularly interested in this demographic, due to the network structure of the general population. In the diagram above, there is a red region of the curve that represents about 3% of the population labelled “The Chasm”; it turns out that roughly 10% of the population (the Innovators and many of the Early Adopters) “just get” the product. The remaining 3%, the most hesitant of the Early Innovators, turns out to be crucial to the success of a starting company. This is the 3% that needs to be convinced; they don’t necessarily have higher thresholds, but they need to be convinced to buy a product. After this 3% is convinced, the product usually reaches a critical mass, and the product spreads throughout the Early Majority, Late Majority and Laggards as their thresholds are easily reached. But companies need this 3%.
Many start up companies fail to get the last Early Adopters they need; this is the “boom or bust” line of many companies. For this reason, it is in the best interest of any company introducing a new product to capture these critical buyers that need to be convinced – how do they do that? Marketing! Especially for products or services geared towards the general population, early marketing campaigns are clearly aimed towards the 3% described above: younger, better off financially, and better educated. Well designed marketing campaigns know that if they capture this demographic, their products are more likely to be adopted by the entire population. No one has ever marketed a new social media app towards senior citizens, because older people tend to have higher threshold values, so they generally aren’t the “Early Adopters” necessary for the product’s success. The exceptions to this trend are products marketed towards specific demographics. This theory explains the “vibe” of many of the ads we see in everyday life, particularly those coming from successful companies with accomplished marketing departments. These ads disproportionately target the demographic required to reach the threshold of the early majority, to reach a critical mass.
Source:
- Hausman A., “Innovation: Adoption and Diffusion in the Age of Social Media”, www.hausmanmarketingletter.com, 2014.