Why Most Product Launches Fail
This article explores the various reasons why product launches fail and I thought it would be interesting to relate it to the content that we covered in class about popularity cascades and market expectations along with economic and business reasons to explain what is happening. The article initially gives some daunting statistics about how many new consumer products don’t break into the market. Less than 3% of new consumer products make $50,000,000 a recognized bench mark of profit that is usually needed to continue supply for a 2nd year. A product not making money could be caused by it’s initial popularity. If people do not know many people that are using the product then they are not receiving positive signals, when we applied Bayes theorem in class to figure out the probability of a product being good despite receiving bad signals, it did not require many people for the probability to drop below a 1/2 and so people began to ignore their own signals forming a cascade. To build on the idea of a lack of popularity, if the product cannot convince enough people that is worth buying then the market is unlikely to surpass the tipping point or first equilibrium on the reservation price graph. Sales below the first equilibrium will have a downward force acting upon it driving it to zero. For 97% of new consumer products we could guess that this is what is happening, that new products do not gain enough momentum and the population do not receive enough positive signals to drive sales past the tipping point. If these products were being driven past the tipping point then we would enter the portion of the reservation price graph where reservation prices are actually greater than the product price (because the reservation price curve is concave and intersects product price at two locations). As a result that fraction of the population would be encouraged to buy the product as market forces would drive sales up to the 2nd equilibrium. At the 2nd equilibrium profits would be high enough that companies could continue to supply the new product for a 2nd year.
The natural question now is that why do companies fail after they have reached the 2nd and more stable equilibrium. Sometimes the speed of growth is too much and a shift in production methods can effect product quality. If product quality decreases then essentially it behaves kind of like a new product in the sense that people have to trust that it is still as reliable as before. Negative signals can spread around which discourages new buyers and existing users to switch to alternate products. People lose faith in the new version of the old product and sales are driven back towards 0. This explanation of how a product could fall from away from the 2nd equilibrium can also be applied to how products disappoint when released into the market. For example, the Wii U was a highly anticipated follow up product to the Wii but it was rushed through production and the catalog of games for the console were lacking. Negative signals and feedback quickly spread through the market and a negative cascade formed where people did not buy the Wii or sold it back. The product with a high amount of initial sales turned out to be a flop for Nintendo.
Other flaws described in the article such as “product limbo” and product ambiguity can also be reasoned with using market cascades and reservation price graphs. If the product doesn’t appeal to consumer tastes or it doesn’t provide one thing nor the other such as the failed product coca cola C2 exampled by the article then it is not likely to gain popularity or positive signals if there are very few users of the product. The product might not necessarily be bad but if people question it’s usefulness or then it is unlikely to break the tipping point and it will fall into obscurity.
Charles Ferguson CCF65