Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?

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A lot of great new technologies are introduced into the marketplace, only to flounder and fail to be adopted by users. In many cases, users’ failure to adopt new technologies is due technology providers’ failure to consider two important factors: ecosystem completeness and switching costs.

Ecosystem Completeness

Every technology introduced into the market offers users a particular value-in-context; that is, the technology enables users to generate value under specific conditions.

Take, for example, an cellphone. For users to be able to generate value from a cellphone, they must have

  1. An cellphone,
  2. A charged battery (e.g., access to electricity services)
  3. Connection services (including a phone number), and
  4. Other people to call.

All four of these pieces must be present simultaneously for the cellphone to provide value to the user. Conversely, if any of those four pieces is missing, then the cellphone provides no value.

Many people are familiar with the ecosystem completeness issue in the context of the chicken-and-egg problem associated with new technology systems. A case in point is the current chicken-and-egg situation in which lack of easy access to charging stations is delaying adoption of electric cars.

However, the ecosystem completeness problem is much bigger than the basic chicken-and-egg problem, and it can be very nuanced at times, by including subtle components in the ecosystems at issue. For example, here in the US we take easy access to electricity for granted. However, many people in the world lack access to electricity. Likewise, most people in the US have telephones – everyone knows a plethora of potential people they can call on their phones. However, many people elsewhere don’t have phones. In either case, lack of access to electricity or lack of telephone penetration, adoption of cellphones – which would otherwise seem to provide tremendous value to users – will be hampered.

If a new technology is floundering in the market and not being adopted by users, then providers should make sure that every piece of the ecosystem necessary to support their technology system, and thus provide value to users, is in place.

Switching Costs

Systems providers must convince users of the value proposition of their new technology systems. When assessing this value, providers tend to focus on the benefits relative to the costs of the new technology system itself. What systems providers often fail to consider, however, are the users’ switching costs.

Most new technology products and services provide value to users by enabling them to do something that they’re already doing, but in a better – easier, faster, cheaper – way. The old way provides some basic value to users, say Value, while the new system will generate additional value, say Value + Surplus, to users.

For users to adopt the new technology systems, though, they must incur not only the costs of the new technology, but also any other switching costs required to transition from their old system to the new system. Switching costs include, for example:

(S1)  Disentangling themselves from their old systems, which includes, for example, disposing of old assets and disconnecting from old obligations (contracts, subscriptions, etc.);

(S2)  Purchasing and installing the new system;

(S3)  Purchasing and installing any accessory products or services that operating the new system requires;

(S4)  Updating old content (e.g., data files) to conform with the new system; and

(S5)  Training staff to use the new system.

So now let’s compare the value to users of old and new technology systems:

Net Value of Old System:   Value

Net Value of New System:  Value + Surplus – (S1) – (S2) – (S3) – (S4) – (S5)

For Users to be better off with the new system rather than the old system, the net value that the new system provides must be larger than the net value users achieve by staying with their old systems:

Adopt New System Only If

Net Value of New System > Net Value of Old System,

Which is true only if

Value + Surplus – (S1) – (S2) – (S3) – (S4) – (S5) > Value,

Which yields

Surplus > (S1) + (S2) + (S3) + (S4) + (S5).

In other words, users will only be better off adopting the new system if the marginal value of the new system – that is, that value the new system provides over and above the value provided by the old system – is greater than the total costs of moving to the new system, which includes new system costs plus switching costs.

While switching costs can very well hamper user adoption of new technologies, the good news is that oftentimes providers can overcome the hurdles – and thus promote adoption – by helping users to mitigate switching costs.

Read more about ecosystem completeness, switching costs, and other technology adoption issues in Winning the Hardware-Software Game: Using Game Theory to Optimize the Pace of New Technology Adoption.

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