Start-ups are designed to grow quickly, but successful start-ups grow smart. This course is designed to provide you with an understanding of the essential elements of successful scaling, including an overview of demand generation, customer acquisition, adoption, diffusion and forecasting demand. You’ll also learn how to market effectively using best practices of digital marketing, social media, PR, SEO, and pricing. Finally, you’ll cover the nuts and bolts of building a sales process, partnerships and supply relationships, and examine the crucial components of attracting, developing and retaining talent. By the end of this course, you’ll have an outline of an expansion strategy for your idea or enterprise, and also be ready for Entrepreneurship 4: Financing and Profitability
Diffusion and Adoption
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From the course by University of Pennsylvania
Entrepreneurship 3: Growth Strategies
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From the lesson
Module 1: Acquiring Customers and Forecasting Demand
This first module focuses on strategies to acquire customers and understand product demand when a start-up is in growth mode. You’ll learn foundational economic concepts in customer acquisition, including customer value over time, customer lifetime value and ROI, and customer equity. You’ll also learn about the key theory of “two-sided markets” and explore how entrepreneurs can build these markets through pricing and subsidization. Even the most exciting and useful new products and services face challenges in convincing people to adopt them, and so you'll explore actionable research and examples that explain the rate of diffusion, the adoption of new products, and ways to attack the challenge of forecasting demand. By the end of this module, you’ll have a solid grounding in the core concerns of start-ups as they move from launch to growth.
Meet the Instructors
Kartik HosanagarProfessor
Wharton School
Lori RosenkopfVice Dean and Director, Wharton Undergraduate Division
Simon and Midge Palley Professor of Management
David HsuRichard A. Sapp Professor of Management
The Wharton School
Laura HuangAssistant Professor
Management
Ethan MollickAssociate Professor
Associate Professor of Management- Wharton School
David BellXinmei Zhang and Yongge Dai Professor, Professor of Marketing
Marketing
Karl T. UlrichVice Dean of Entrepreneurship and Innovation
The Wharton School
I'm Karl Ulrich, professor at the Wharton School.
This session is on Diffusion And Adoption.
I want to start with a story,
several years ago I was driving with one of my doctoral students to a research
site at a local pharmaceutical company outside of Philadelphia.
On the way back, we were stopped at a toll booth, and
hundreds of cars were lined up behind the toll booth that only took cash,
whereas we flew through the lane that was for EZPass.
One of the technologies that puts a monitor, a beacon, in your car and
allows you to pay your tolls automatically.
My doctoral student, who was a recent Immigrant from India, turned to me and
said, Carl, why doesn't everybody have EZPass?
That's a puzzling question for entrepreneurs.
You've created a great product or service and
you're now asking the question, why doesn't everybody buy my product?
Why doesn't everybody who could use this product actually buy it?
The reality in entrepreneurship is that diffusion and
adoption is painfully slow even for really exciting new products.
So, in this session,
we're going to turn to the question of, what explains diffusion and adoption and
what explains the rate at which customers adopt your new product or service?
This graph shows the diffusion of major new category products
in the United States, so this is products like television, the clothes dryer,
refrigeration, air conditioning, major new categories of innovation.
You can see here that, for most of these major new categories, eventually,
almost 100% of households adopt the product, and, in fact,
it looks at first glance like the diffusion rate is almost instantaneous.
That is, that the full population adopts these products very,
very quickly that those lines go almost to vertical, but the reality is,
if you look a little more carefully, that there's a relatively long period between
when the product is first introduced and when you see that near vertical takeoff.
So, for instance, if we look at air conditioning,
air conditioning is actually introduced into the market at around 1945,
but it's not until the early 1950s that air conditioning really takes off.
This is for a fundamental technology that really
dramatically improves the quality of life for those who live in very hot climates.
What explains the fact that diffusion takes so long, that it takes so long for
something to get started, and then it takes remarkably long for
it reach full saturation of the market?
We can think about the adoption dynamic
as being characterized by two basic parameters.
The first is, how long between the time the product is introduced
until the so-called take off occurs, and you can think of that as the time
between introduction and when that curve starts to go vertically very quickly.
In these two examples, one of the Web browser and
the other the mobile telephone, takeoff occurs for the Web browser after about two
years, and it takes off for the mobile telephone after about nine years.
That's the first parameter, what's the time required before the takeoff occurs?
The second key parameter is, what's the peak adoption rate?
That is, once the product has taken off,
how fast does it grow when it's growing at its quickest?
So, in this case, in the case of the Web browser, the peak adoption rate is about
9% of the market every year, and that's remarkably fast.
In the case of the mobile telephone, it's about 7% of the market every year.
We now want to understand better, what explains products or services that
take off really quickly versus those that take a long time before they take off?
Fortunately, there have been several scholars and writers
who've really studied this question of adoption and of adoption rates.
Probably the most significant is a sociologist named Everett Rogers,
who wrote a book called The Diffusion of Innovation, and
Rogers categorized adopters into five categories.
He said, if you think about the time over which a product or service is introduced,
those who adopt at the earliest stage are called the innovators,
those that adopt next are called early adopters, those that adopt
next are called the early majority, the next category is the late majority,
and then the final category is the laggards.
And so, shown here on this graph you could think about adoption rate
as the vertical axis and time as the horizontal axis.
In general, markets develop with this sort of bell shaped form,
which is you get some early adopters, and then,
with the passage of time, the majority, the early majority, and
the late majority eventually join in, and that's where the bulk of the market is.
And so, this is adoption rate.
If you were then to look at cumulative adoption, what you would see is that
characteristic s-shape curved, which starts slow, grows quickly, and
eventually saturates as the majority of the market eventually adopts the product.
Now it's worth noting that these categories identified or
articulated by Everett Rogers are for an innovation that does eventually diffuse,
that is eventually adopted by the majority of the market.
Certainly, there are many instances of products that never make it,
that never make it to the majority, that remain niche products.
That insight was articulated by a writer named Jeffrey Moore who
adopted the term the chasm to represent the gap that's faced by an innovator
between getting a few early adopters, few innovators to adopt the product and
crossing the chasm to early adopters, which would lead into the early majority.
Moore argues that many start-ups get hung up in going beyond
those early innovators to the early adopters and the early majority.
The characterization of Rogers would apply to categories that eventually diffuse,
and Moore added to the discussion by pointing out that some innovations
never get to the early majority because they fail to cross the so-called chasm.
Everett Rogers then went on to describe a study in which he looked at hundreds
of innovations in society, and he then did some statistical analysis of those
innovations in order to identify, what were the intrinsic factors of
the innovation that explained differences in those key parameters of adoption rate?
That is,
what were intrinsic factors of innovation that could explain those innovations that
took off early versus those that took a long time before they eventually took off?
Rogers identified five factors, the first is relative advantage,
and this simply says, how much better is the new product or
service than the alternative that came before it?
Obviously, a product that lets blind people see, that is,
that provides amazing and tremendous relative advantage,
is going to diffuse faster than a product or service that's a little bit faster,
a little bit cheaper, a little bit more convenient,
that has just relatively small degrees of relative advantage.
The second factor that Rogers identified is visibility, and
this insight is based on the observation that
often people adopt when they see others using the product or service.
So, a product or service that's highly visible is one that will diffuse
from one person to another, more readily.
To evoke an example, consider the Segway Personal Transporter.
The Segway Personal Transporter, while it suffered from relatively modest relative
advantage, the first factor, it has very high visibility so that when somebody
is using the Segway it calls a lot attention to the user and people notice.
That's a big positive factor
in explaining when an innovation will diffuse more quickly.
The third factor in Roger's framework is trialability, and
the idea behind trialability is, how much cost time or effort
is required for a potential customer to be ultra try our experience the product?
In the case of Segway, intrinsically it would be quite difficult to
try their product if it required purchase because I'd have to lay out 5 or
$10,000 in order to be able to try the product through purchase.
You can imagine some things that the designers and
entrepreneur could do to make the product more trialable, to make it easier to try.
For instance, you could set up kiosks that would allow someone to rent or
try the product on a demo basis for just a few minutes without requiring purchase.
Trialability is the third factor,
the more trialable, the faster the product will diffuse.
The fourth factor is simplicity, and what Rogers meant by this was that when you,
as a non-adopter, as a potential customer, see someone using the product or
service, how obvious is it to you how it works and what the benefit is?
For instance, if you were to just look at the Segway, how obvious would it
be to you what the features and benefits were, how easy is it to charge,
how do you store it, how do you use it with public transportation?
That's simplicity, the simpler the product is to understand,
the faster it will take off.
The last of the five factors is compatibility, and
what Rogers meant by this is, if you adopt the product or
service, what else do you have to change in your life in order for that product or
service to work compatibly with the other things you do in your life?
For instance, if we go back to the Segway example, if I buy a Segway,
does it require that I have a different kind of vehicle to haul it around in?
Does it require that I rearrange the furniture in my office?
Is it compatible with the other things in my life?
The fewer things the customer has to change, the more likely it is that he or
she will adopt the product.
What Rogers did was to do some statistical analysis and
was able to show that these five intrinsic factors of the product or
service explain the rate at which that product or
service diffuses in society, if and when it eventually diffuses.
Now, those five factors are not quantitative variables,
they're hard to quantify,
they would be hard to parametrize in a mathematical expression, but we
can make some subjective estimates of the relative strength of those five factors.
Shown here is a table in which I've taken four innovations,
the EZPass Automated Toll System, the Web browser,
the mobile phone, and the Segway personal transporter.
I've simply estimated with one to five bullets how those innovations stack up,
relative to the five factors that Rogers identified.
Relative advantage, visibility, trialability, simplicity and
compatibility.
You as you think about the diffusion rate for your product or
service, can do a subjective judgment relative to some of these examples,
and to say, okay, just on a 1 to 5 scale, how does my product or
service stack up relative to these alternatives?
That then will let you make a judgment,
which you expect your product or service to diffuse
more rapidly than average relative to other similar kinds of innovations.
Now, again, these five factors don't predict whether the product or
service will eventually diffuse.
Rather, they predict the rate at which you'll get there, and so
it's quite useful in planning your business, in thinking about your demand
forecast, to do an honest assessment of, how much relative advantage do I have?
How visible is my product in use?
How easy is it for a customer to try this product?
How simple is it to understand?
And how compatible is this product or
service with the lives of my target customers?
That then can allow you to predict will this be relatively fast or
will it be relatively slow, in terms of the time to take off and
the rate of which the innovation diffuses.
In sum, the time to take off for new category innovation, so
that's major new products or services, is typically much longer than you expect.
Very rarely do you see it take off in quicker than two years, more typically
we see four, five years before a major new category innovation will take off.
Now, if your product is somewhat derivative,
it's a better version of something that is already in the market, then you can see
take off happen much quicker than that, much shorter than two years.
But, more typically, in a major new type of innovation,
you're going to see the takeoff take two, three, or
longer years, and that's longer than most entrepreneurs expect.
The second key insight is that there's some intrinsic
attributes of the innovation, of your product or
service, that underlie the rate at which that product or service will diffuse.
Most of those attributes are not things you can change.
The relative advantage, for instance,
is something that's quite intrinsic, quite fundamental to your product or
service, but a few of those attributes you can modify somewhat.
So, for instance, trialability is an attribute that you,
through the design of your business model and
possibly your distribution channel, can directly influence.
Fourth, be realistic in assessing the time to take off.
Remember, these attributes don't predict whether you will eventually be successful,
they inform how long it's going to take.
As you think about your business plan, as you construct your financials,
as you make your forecast out over time,
be realistic in assessing whether your innovation is likely to be slower or
faster than similar kinds of innovations that have developed historically.
By being realistic,
you can then make financial forecasts that are realistic, and that makes it
less likely that you're going to run out of cash just when you need it most.
And then, lastly,
to be clear, our discussion has focused on innovations that do eventually take off,
some innovations never take off, and that isn't a problem of diffusion rate.
That is typically a problem of not having sufficient fundamental advantage, relative
to the alternatives, relative to the competitors, that are in the marketplace.
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