Virtually every new product (or service) is a substitute for an existing solution. New entrants often have high expectations for rapid growth. Both the penetration rate and revenue levels achieved are frequently well below plan. Typically, the variance is due to adoption rate/market size estimates which prove to be overly optimistic. Significant differences between market projections and actual experience is sometimes called the "guru gap." Our clients have shared with us some dramatic examples of guru gaps:
Overly optimistic forecasts can lead to under-capitalization, misallocation of resources and excessive cash burn rates, ultimately setting up a new business for failure. Why, then, are there so many optimistic forecasts and related product launch failures?
One answer is that substitution is a complex process influenced heavily by the number and magnitude of obstacles in the buying process. Our experience suggests that these substitution obstacles fall into five broad categories:
- Where benefits are not directly measurable, purchasing obstacles can be considerable. Some corporations, for example, have justified the purchase of an executive information system without an explicit payback while others have found it difficult to quantify the benefits of better or more timely information.
- Products or services substituting for those made/provided in-house ("outsourcing") can face heavy resistance. Jobs are threatened, control is reduced, and security or trade secrets may be compromised. "Full cost savings" are viewed with skepticism in that fixed costs/overheads often cannot be eliminated.
- "Hidden costs" can offset favorable substitution economics. Incorporating a new component, such as a high performance diode laser, into an existing product line may create substantial added costs in testing, approving and training, and marketing materials.
- Despite an attractive pay-back, up-front investment requirements can slow adoption. The magnitude of an up-front investment may stretch the buyer's resources or require extensive review and multi-layered decision making.
- Small or under-capitalized vendors face major barriers in marketing their substitutes. Buyers consider it risky to depend on small suppliers for long-term service and support. Broad market substitution may be delayed until financial stability can be demonstrated or until a critical mass of customers has adopted the product and enhanced the probability of survival.
- Substitutes requiring significant change in behavior by the end-user can face major obstacles. Digital radiology experienced slow adoption, in part, because many radiologists are more comfortable with traditional film.
Decision Process Change
- A substitute may change the decision making process, often lengthening the timeframe and delaying adoption. In moving from mainframes to distributed computing, the purchase decision shifts from being the domain of central MIS to a more complex interaction with operating units.
- Where existing equipment may still have a useful economic life, or where past investment has not been sufficiently amortized, companies often have difficulty justifying the acquisition of new technology despite an attractive pay-back. Where replacement cycles are long, substitution is typically slow. Conversely, where replacement cycles are shorter, substitution can be more rapid.
- Adoption is generally delayed if the infrastructure to support the substitute is slow to materialize. Typically the two tend to develop together. For instance, the growth of CD-ROM disc volume through 1992 was constrained, in large part, by slow growth in the installed based of CD-ROM players. At the same time, player growth was constrained by the lack of titles. Subsequently, annual growth in player volume has been triple digit, and disc volume has increased dramatically as well.
- Manufacturing methods can be serious substitution obstacles. Advanced materials hold the promise for improved component performance, even at higher raw material costs. But substitution is often constrained by conversion processes that collectively yield unacceptably high unit costs.
New ventures must convince prospective customers to substitute new products/services for existing solutions. The challenge is to anticipate the obstacles to adoption and develop marketing programs to overcome them.
Obstacles, however, are inevitable. An objective assessment of likely adoption rates provides the foundation to set realistic expectations for the business, notably its outlook for growth and financial performance. With these fundamentals in place, the new venture can establish realistic ramp-up goals and reduce the risk of becoming an example of the guru gap.