Adoption and Diffusion of Innovations

Innovation & New Business Planning - TUHH Institute of Innovation Marketing & Institute of Entrepreneurship, Hamburg · part of my Technology Management MBA · study notes for revision.

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The session opens with a slide that is deliberately uncomfortable. First it states the good news: you create value, and customers basically see it. Then, on the next slide, it adds the sentence the whole module hangs on: but why are you still not selling? That gap is the real subject. It is not a product problem, because by assumption the product is good and the value is visible. It is a problem in the head of the customer, and it has a structure that can be analysed.

The answer the section builds is that a customer never buys value on its own. They buy value minus everything the purchase costs them and everything it puts at risk for them, and a large part of that arithmetic is invisible to the seller. Add to this that even a customer who is personally convinced is only one person, and that an innovation has to work its way through a whole population one adopter at a time. Those two levels have names: adoption is what happens inside one buyer, diffusion is what happens across the market over time.

This chapter follows the deck’s own order: the framing question, the catalogue of costs and risks that block adoption, the phases of the buying and usage process where those costs appear, the five barrier types from the electric-vehicle exercise, a set of real company examples of barrier reduction, the Rogers adopter typology, the chasm that breaks the tidy curve, and the two moves that get you across it. Everything here ends in the same place: if the obstacle sits in the customer’s perception, then communication is not decoration, it is the instrument. That is the rest of the session.

Tip

The one idea to carry through. Nobody refuses your innovation because they failed to notice the benefit. They refuse because the perceived costs and perceived risks of switching are bigger than the benefit, and most of those costs and risks never appear on your price list. Selling more therefore means lowering the perceived cost and risk, not shouting the benefit louder.

1 · Adoption and diffusion are two different levels

The two words get used interchangeably in everyday talk, and separating them is the first thing to fix, because they call for completely different management actions.

Adoption one customer, one decision

• The process a single buyer goes through before committing: noticing, evaluating, weighing the risk, trying, buying, and going on using it
• The unit of analysis is a person or a buying organisation
• Blocked by that customer’s own perceived costs and risks
• Your lever: take cost and risk out of their decision

Diffusion a population, over time

• The spread of the innovation through a market as more and more people adopt it
• The unit of analysis is the market, and the extra dimension is time
• Described by the shape of the adopter curve and by who adopts at which moment
• Your lever: sequence the market, win the right group first

Adoption is the individual decision, diffusion is the aggregate of many such decisions plotted against time. Diffusion is literally what you get when you add adoptions up.

2 · Reasons for no adoption: the costs and risks the customer carries

This is the core diagram of the section. The slide lays the reasons out on two dimensions at once. One dimension separates risk from cost. The other separates what is rather open and obvious to everybody, from what is rather hidden and usually never spoken about, not even by the customer.

Open risks visible, admitted, discussable

• Performance and quality risk - will it really do what you claim
• Economic risk - will the money spent pay back
• Compatibility and interface risk - will it fit the equipment and systems already in place
• Damage and liability risk - what happens if it breaks something or hurts someone
• Risk of long-term supply and upgrading service - will you still be there in five years to supply and upgrade it

Open costs countable, budgetable

• Search, evaluation and decision costs
• Installation and set-up costs
• Operating and usage costs
• Maintenance and repair costs
• Logistics and inventory costs
• Recycling and disposal costs

Hidden risks rarely said out loud

• Risk of making the wrong choice, one that turns out to contradict their own needs
• Risk of lacking the knowledge and skills to exploit the full potential of the product or service
• Risk of long-term usability and affordability, for example obsolescence
• Risk of non-acceptance by users or supervisors, a classic B2B killer
• Risk of negative social effects such as dispraise or sanctions

Hidden costs real, but never invoiced

• Opportunity costs of the alternatives and options that were not selected
• Costs of being locked into contracts

Two things are worth underlining. First, only the amber box looks anything like a price, and yet it is the smallest part of the story. Second, the hidden column is where deals quietly die, because a customer will almost never tell you that they are afraid of looking foolish in front of their boss, or that they cannot bear to give up the option of choosing something else later.

3 · The costs and risks appear at every phase, not only at the moment of purchase

The next slide takes the same catalogue and stretches it along the customer’s whole journey. Costs and risks are incurred in all phases of the buying and usage process, so the seller’s question gets asked at every touch point: how can we reduce the perceived cost and risk here?

PrepurchasePurchaseDeliveryInstallationUsageConsumptionMaintenanceDisposalRenewalRepurchase

Lining the catalogue up against the phases is a useful revision exercise, because several of the cost items are named after the phase they belong to:

Phase	The cost or risk that typically lands here
Prepurchase, purchase	Search, evaluation and decision costs; the risk of making a wrong choice
Delivery, installation	Installation and set-up costs; compatibility and interface risk
Usage, consumption	Operating and usage costs; performance and quality risk; the risk of lacking the skills to use it fully
Maintenance	Maintenance and repair costs; damage and liability risk
Disposal	Recycling and disposal costs
Renewal, repurchase	Risk of long-term supply and upgrading service; obsolescence; the cost of being locked in

4 · Five families of adoption barrier

The class exercise asks you to travel five to seven years back in time and list what stopped people adopting electric vehicles when the first ones reached the market, then sort those reasons into five given families. The slide notes that these barriers matter most for substantial innovations, the ones that ask the customer to change behaviour rather than just swap a brand, and it highlights the usage and risk barriers as the dominant pair in the EV case.

Barrier family	What it means	How it showed up for early EVs
Usage	The innovation clashes with existing habits, routines or infrastructure	Charging takes far longer than filling a tank, and the charging network barely existed
Value	No convincing performance or price advantage over what the customer already owns	A much higher purchase price for a car with less range
Risk	Fear of something going wrong, in four flavours: physical, economic, functional and social	Battery fires, unknown resale value, running out of charge, being judged for the choice
Tradition	The innovation collides with established norms, values and long-standing practice	The combustion engine as part of an identity, and the ritual of the petrol station
Image	A negative association attached to the product class, technology or origin, independent of the actual product	Early electric cars seen as slow, toy-like or a political statement

The point of sorting a complaint into a family is that each family has a different remedy: a usage barrier needs redesign or service, a value barrier needs a better offer, an image barrier needs communication.

5 · How real companies take the cost and risk out

The deck then walks through a series of companies that each attacked one specific entry in the catalogue. This is the most quotable part of the section, because every example is a template you can copy.

Company	Barrier attacked	The move
Dell	Installation cost	Pre-install the operating system and the required software on office PCs. The buyer’s own IT administrator needs about 30 minutes per machine; done on the assembly line it takes about 1 minute
Evonik	Usage cost	Analytical services along the animal-feed chain: amino-acid analysis and prediction for the incoming material, plus a quick batch test of the output, so the customer adds fewer amino acids and gets more constant quality
DZ-4	Initial investment	Do not sell the hardware at all - rent, lease or operate it for the customer
Bentekk	Usage risk	Rent out the gas detectors so that users can simply try the device instead of committing to it
Orica	Transport and storage risk	Stop selling packaged explosive; sell bulk systems, that is raw materials, delivered to the bench and mixed directly into the blasthole
Car offer	Hidden opportunity cost	Buy one car and rent all the others for free, which removes the pain of the options you did not choose

Underneath the six examples there are really only three mechanisms. Move the work to whoever can do it cheaply, which is the Dell logic: the identical task costs 30 minutes at the customer and 1 minute in the factory, so the seller absorbs it. Sell the outcome rather than the box, which is the Evonik logic: the analytical services cut the cost of formulated feed by roughly 0.5 to 3 dollars per ton, an approximate total saving of 1 to 2 percent, so the customer buys a result instead of a chemical. Let people use it without owning it, which is what DZ-4 and Bentekk do: renting and operating turn a large irreversible decision into a small reversible one.

DZ-4 in detail, because it is the cleanest business-model answer

The Hamburg company DZ-4 supplies, installs and operates rooftop photovoltaic arrays on houses. DZ-4 owns the installation and runs it as the operator, and all the elements - hardware, installation, maintenance and technical management - are outsourced to partners. The house owner pays a fixed monthly fee for the array plus a price per kWh supplied, with the kWh price fixed for 24 months. After ten years the customer may buy the array for its residual value, set at 50 percent of the initial value. If the customer instead cancels after ten years and does not want to buy the array, DZ-4 pays a leasing fee for the roof. Notice how many separate entries in the risk and cost catalogue this single construction removes: the initial investment, the performance risk, the maintenance cost, the obsolescence risk and the fear of being trapped.

The deck also puts a name on the least obvious of these moves: reduction of hidden customer risk, which it summarises as helping the customer to make the right choice. The free-rental car offer is the illustration of a hidden cost specifically, namely the opportunity cost of the options that were not selected. A buyer who can still drive the other models has not really given anything up, so the decision stops feeling final.

6 · Diffusion: the adopter categories

Diffusion research, the deck says, has been heavily influenced by the adopter typology of Everett Rogers. Plot the number of adopters against time and you get a bell-shaped curve; cut that curve at the mean and at one and two standard deviations away from it, and you get five groups with fixed shares.

Adopter category	Share of the market	Where it sits on the curve	Running total
Innovators	2.5 percent	Earlier than two standard deviations before the mean	2.5 percent
Early adopters	13.5 percent	Between two and one standard deviations before the mean	16 percent
Early majority	34 percent	From one standard deviation before the mean up to the mean	50 percent
Late majority	34 percent	From the mean to one standard deviation after it	84 percent
Laggards	16 percent	Everything beyond one standard deviation past the mean	100 percent

Innovators 2.5Early adopters 13.5Early majority 34Late majority 34Laggards 16

The number worth memorising is that the first two groups together are only 16 percent of the market. Everything that feels like early traction is happening inside that 16 percent, and the money is in the two majority blocks that have not moved yet.

7 · The curve is not a natural law: the chasm

The slide is blunt about this. The bell-shaped diffusion curve is not a law of nature, and in many high-tech markets it simply does not complete, because a chasm sits between the early market and the mainstream market. The two sides of that gap are not two points on one continuum, they are two different kinds of buyer who want opposite things, which is why word of mouth does not carry across.

Visionaries the early market

• Adventurous by disposition
• Aim for first-strike capability and want to destroy the existing industry standards
• Prefer the supplier offering the fastest, smallest or lightest solution
• Want unique and new features
• Focus on the product price

Pragmatists the mainstream market

• Cautious by disposition
• Want well-proven, high-quality products and want to preserve the standards
• Prefer suppliers with a large installed base and buy from proven market leaders
• Want reliable services
• Focus on the total cost of ownership

Every single line is a mirror image. The evidence that impresses a visionary - being first, breaking the standard, having no installed base yet - is exactly the evidence a pragmatist uses to say no.

8 · Crossing the chasm: patience, marketing and a beach-head

The deck gives two remedies, and they work together rather than as alternatives.

First customersearly adopters, the visionaries who bought because it was new

↓

The chasmwhere the pragmatist asks who else in my industry already runs this

↓

Beach-headone narrow niche, completely won, used as the springboard

↓

Mainstream customersthe early majority, the pragmatics, and the volume

The route across. You do not jump the chasm with a bigger product claim, you build a landing point on the other side and then widen it.

Remedy one, be patient and do marketing. The listed measures are all about accumulating the proof a cautious buyer needs: exhibit at industry shows, get featured in industry magazines, be installed elsewhere in the industry so there is a reference to point at, build alliances within the industry, and earn a reputation for reliable service. Every one of these attacks a pragmatist objection rather than a visionary one.

Remedy two, concentrate on a beach-head. Pick one market segment or application area and go narrow: develop applications specific to that niche, create a whole offer there covering product, service and distribution, and then use market leadership in the niche as a springboard into adjacent markets. Being the obvious leader of a small niche is credible to a pragmatist in a way that being an interesting newcomer in a big market never is.

9 · Why this leads straight into communication

The section closes with group work: what is the single biggest adoption cost or adoption risk for your targeted customers, and do you have a first idea how to reduce it? The instruction to focus on one is the lesson in itself, because you cannot dismantle every barrier at once.

Some barriers are dismantled by engineering or by the business model, as DZ-4 and Orica show. But a large share of them are perceived rather than real: the customer does not know how the product performs, cannot picture the total cost of ownership, has nobody in their own industry to point at, and is afraid of how the choice will look internally. Perceptions are changed with messages, senders, channels and evidence, which is precisely the agenda of the rest of the session: recipients, objectives, measures and KPIs, channels and media, and messages. The deck also warns that in high-tech and industrial markets there is often a problematic attitude to this work in the first place, the belief that the value is obvious anyway and that polishing communication is somehow less real than the engineering. That attitude is exactly what leaves a good innovation unsold.

Case corner

Hyundai in the financial crisis. The mini case that opens the session, given to the class with six minutes to answer.

The situation. It is 2008 to 2009, the depths of the great recession in the USA. The economy has faltered and the future job prospects of millions of employed Americans look uncertain. Hyundai targeted customers in the lower-income segment and was therefore hit particularly hard by the mortgage crisis: its US sales dropped 37 percent. Automobile sales collapsed across every brand, GM and Chrysler saw their financial problems resurface and both had to seek government bailouts. Most car manufacturers responded in the same way, with discounts, cash-back offers and dealer-lot incentives.

The question put to the class. How could Hyundai react to this very challenging situation?

How this chapter answers it. Run the diagnosis from section 2 before reaching for a price cut. Ask what is actually stopping a person in that segment from buying, and the honest answer is not the sticker price - it is economic risk, and specifically the hidden version of it: the fear of signing a multi-year commitment and then losing the job that pays for it. That is the risk of long-term affordability sitting right in the hidden column, sharpened by uncertain job prospects. Everyone else in the industry was attacking the open cost side with discounts and cash back, which is the one dimension that was not the binding constraint. Discounting does nothing for a buyer who is risk-blocked rather than price-blocked, and it burns margin at the worst possible moment while training the market to wait for the next offer.

The move that follows from the framework is therefore to absorb the risk instead of cutting the price: guarantee that if the buyer loses their income within the first year, they can hand the car back and walk away from the obligation. That converts an irreversible decision into a reversible one, exactly as renting does for the Bentekk detector and as the operator model does for DZ-4. It costs little if the fear turns out to be larger than the reality, it is awkward for a discounting competitor to copy without admitting that its own customers are worried, and it gives the brand something genuinely new to say rather than one more number on a windscreen.

The transferable lesson. When a market freezes, first work out whether you face a cost barrier or a risk barrier. Price tools fix cost barriers. Only guarantees, trials, rentals, references and service commitments fix risk barriers, and matching the competition on the wrong dimension is expensive and useless.

Apply it to your project

1. Write down the value you believe you create, in one sentence, then accept the premise of the opening slide and assume the customer can see it. Whatever comes next is not a benefit problem.

2. Name one specific target customer in one specific situation. Barriers are not properties of a product, they are properties of a person facing a decision, so a vague customer produces a vague barrier list.

3. Walk the full catalogue from section 2 against the phases from section 3. Take the open risks, open costs, hidden risks and hidden costs one by one, and ask at each touch point from prepurchase through usage to disposal and repurchase what it costs this customer and what could go wrong for them there. The hidden column will feel speculative, which is exactly why it is worth writing down.

4. Sort what you found into the five barrier families - usage, value, risk, tradition, image - because the family tells you which department owns the fix.

5. Pick exactly one barrier, the biggest, as the group-work slide demands. Focusing on one is the whole discipline of this exercise.

6. Choose a reduction mechanism from the examples. Move the work to where it is cheap as Dell does, sell the outcome as Evonik does, remove ownership through rental, leasing or an operator model as DZ-4 and Bentekk do, redesign the offer so the danger disappears as Orica does, or neutralise the opportunity cost of the alternatives.

7. Decide whether the barrier is real or perceived. Real barriers need product, service or business-model changes. Perceived barriers need evidence and communication, and that single decision routes the problem to the right chapter.

8. Locate yourself on the diffusion curve and name your beach-head. Are your current customers innovators and early adopters, that is the first 16 percent, or genuine early majority? If everyone who loves you is a visionary, the chasm is ahead of you, so pick one narrow niche where you can build a whole offer of product, service and distribution, become the visible leader, collect the references and industry coverage that pragmatists ask for, and only then move into the adjacent market.

Key terms

Term	What it means in plain words
Adoption	The decision process a single customer goes through before committing to and continuing to use an innovation
Diffusion	The spread of the innovation through a whole population over time, which is the sum of many individual adoptions
Perceived cost and risk	Everything the customer believes the purchase will cost them beyond the price, and everything they believe could go wrong, from the product underperforming to being blamed internally for the choice
Open risks and costs	The ones everybody can see and discuss openly, such as price, installation effort or quality risk
Hidden risks and costs	The ones rarely admitted, such as fear of choosing wrongly, lacking the skills to use it, social disapproval, lock-in, and the opportunity cost of options given up
Usage barrier	The innovation does not fit the customer’s existing habits, workflows or infrastructure
Value barrier	The performance or price advantage is not big enough to justify the change
Risk barrier	Fear of harm in one of four flavours: physical, economic, functional or social
Tradition barrier	The innovation conflicts with established norms, values and long-standing practice
Image barrier	A negative association attached to the product class, technology or origin, regardless of the actual product
Adopter categories	The Rogers split of a market into innovators, early adopters, early majority, late majority and laggards, by how early they adopt
Chasm	The gap between the early market of visionaries and the mainstream market of pragmatists, which many high-tech products never cross
Beach-head	One narrow niche you win completely, with a whole offer, and then use as the springboard into adjacent markets
Total cost of ownership	The full lifetime cost of owning and running something, which is what pragmatists judge on rather than the purchase price

Test yourself

1. State the two-slide question the session opens with, explain in one sentence why it is not a product problem, and give the difference between adoption and diffusion.
2. The reasons for non-adoption are arranged on two dimensions. Name both dimensions and give one concrete example from each of the four resulting boxes.
3. A customer says the product is too expensive. Using the catalogue and the barrier families, list three things this complaint could actually mean, only one of which is about the price.
4. Give the five adopter categories with their percentages, and state what share of the market has adopted by the end of the early adopters.
5. What is the chasm, why does it exist, and what are the two remedies the deck gives for crossing it?
6. Match each company to the barrier it attacked and the mechanism it used: Dell, DZ-4, Bentekk, Orica.

Answers

1. The first slide says you create value and customers basically see it; the second asks why you are still not selling. It is not a product problem because the premise already grants that the value exists and is visible, so the obstacle sits in the customer’s perception of costs and risks. Adoption is then the decision process of one individual customer, managed by removing that customer’s perceived costs and risks, while diffusion is the spread of the innovation across a population over time, managed by sequencing the market and winning the right group first.
2. The dimensions are risk against cost, and rather open against rather hidden. Open risk: performance and quality risk, or compatibility with existing systems. Open cost: installation and set-up, or disposal. Hidden risk: fear of non-acceptance by users or supervisors, or lacking the skills to exploit the full potential. Hidden cost: the opportunity cost of alternatives not chosen, and being locked into a contract.
3. It could mean the value barrier, that the benefit is genuinely not worth the money. It could mean an unspoken total cost of ownership worry, where installation, operating, maintenance and disposal costs dwarf the purchase price. It could mean economic risk, where the customer is not sure the investment will pay back or that they will still be able to afford it, which is a risk statement dressed up as a price statement. Only the first is really about the price tag.
4. Innovators 2.5 percent, early adopters 13.5 percent, early majority 34 percent, late majority 34 percent, laggards 16 percent. By the end of the early adopters only 16 percent of the market has adopted.
5. The chasm is the gap between the early market of visionaries and the mainstream market of pragmatists. It exists because the two groups want opposite things: visionaries are adventurous, want first-strike capability, want to destroy standards and focus on product price, while pragmatists are cautious, want proven quality, a large installed base, a market leader, reliable service and a good total cost of ownership, so a visionary reference does not persuade a pragmatist. The two remedies are to be patient and do marketing - shows, industry magazines, installations elsewhere in the industry, alliances, a reputation for reliable service - and to concentrate on a beach-head niche with a whole offer, then use leadership there as a springboard.
6. Dell attacked installation cost by pre-installing software, cutting about 30 minutes of the buyer’s IT-administrator time down to about 1 minute on its own assembly line. DZ-4 attacked the initial investment by owning and operating the rooftop PV array itself and charging a monthly fee plus a per-kWh price. Bentekk attacked usage risk by renting out its gas detectors so users could try them. Orica attacked transport and storage risk by selling bulk raw materials mixed directly into the blasthole instead of packaged explosive.

Revision summary

Tip

The one-minute recap

• The session opens with you create value and customers basically see it - so why are you still not selling? The gap is not the product, it is the customer’s perception of what the purchase costs and endangers.
• Adoption is one customer’s decision process; diffusion is the spread of the innovation through a population over time. Diffusion is adoption summed up.
• Reasons for non-adoption sit on two dimensions: risk versus cost, and rather open versus rather hidden. Open risks include performance and quality, economic, compatibility and interface, damage and liability, and long-term supply and upgrading. Open costs include search and decision, installation, operating, maintenance, logistics and disposal. Hidden risks include choosing wrongly, lacking the skills, obsolescence, non-acceptance by users or supervisors, and social sanctions. Hidden costs are the opportunity cost of unchosen options and contract lock-in.
• These costs and risks arise in every phase from prepurchase through usage to disposal and repurchase, so the reduction question is asked at every touch point.
• Five barrier families: usage, value, risk (physical, economic, functional, social), tradition and image. They matter most for substantial innovations, and usage plus risk dominated the early EV market.
• Reduction templates: Dell moves installation work to where it is cheap, 30 minutes at the customer versus 1 minute in the factory. Evonik sells the outcome, saving roughly 0.5 to 3 dollars per ton of feed, about 1 to 2 percent. DZ-4 owns and operates the rooftop PV so the customer invests nothing. Bentekk rents the gas detector so users just try it. Orica sells bulk explosive mixed on site instead of packaged. A free rental of every other model kills the opportunity cost of the options not chosen.
• Rogers adopter categories: innovators 2.5, early adopters 13.5, early majority 34, late majority 34, laggards 16 percent. The early market is only the first 16 percent.
• The bell curve is not a natural law. A chasm separates visionaries, who are adventurous, want to break standards and focus on product price, from pragmatists, who are cautious and want proven products, a large installed base, market leaders, reliable service and a good total cost of ownership.
• Cross it by being patient and doing marketing - shows, magazines, installations in the industry, alliances, a service reputation - and by taking a beach-head niche with a whole offer, then springboarding into adjacent markets.
• Because so many barriers are perceived rather than real, the fix is communication, which is where the session goes next.

Next: Communication: Recipients → - who exactly are we talking to.