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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Latest Comments

  • Anonymous said More
    Well written. Well constructed. Tuesday, 13 August 2019
  • Ron Giuntini said More
    As always a good read.
    I have always... Thursday, 25 January 2018

The US medical cannabis market is currently in its early stages of adoption: the market has gained some penetration, but not enough to warrant adoption by the early majority, that is, more mainstream users. My book, Winning the Hardware-Software Game, describes the technology adoption lifecycle in detail. A brief summary and illustration (Figure 1) of the technology adoption process taken from the book indicates:

[T]he consumption lifecycle of a new innovation entails adoption by four general groups of users: (1) innovators and early adopters, risk takers, who are attracted to novel innovations that offer new and different features and capabilities; (2) the early majority, who are more deliberate in their purchasing decisions, requiring bug-free products whose value has been validated by early adopters; (3) the late majority, a skeptical lot, who demand low prices and large amounts of product support; and finally (4) laggards, the traditionalists, who adopt new innovations only when forced to do so.

Figure 1

tech adoption

By understanding the wants and needs of majority adopters, we can ask: how must the medical cannabis market evolve to become amenable to adoption by more mainstream users?

Our goal is to surmise the wants and needs of more mainstream adopters. We can achieve this, first, by considering how cannabis provides value to those adopters. Once we understand the value proposition, we can then determine how the market will evolve to increase value to users.

How Technology Provides Value to Users

When deciding whether or not to use cannabis medicinally, prospective users will weigh the expected benefits and costs. In my book, I decompose these benefits and costs of adopting a new technology into four distinct components.

Inherent Value of Technology

First, there’s the inherent value of the technology users. People are more likely to adopt a technology when the technology provides greater benefits, net of costs, to users. In the case of medical cannabis, the technology value is the extent to which users think cannabis will treat their medical conditions, net of the purchase costs and potential risks of harm cannabis may cause them:

(1)       Inherent Value of Technology

= Expected Medical Improvement – Purchase Costs – Expected Risks

Value of Interacting with Other Users

Second, there’s the value to users of being able to interact with other people who have adopted the technology (i.e., the value of direct network effects). For example, in the case of telephones, the value of having a phone is greater when there are more other people with phones, because then you can potentially call more people. Telephones thus provide users with large direct network effects. It follows that people are more likely to buy a phone when more other people already have phones.

In the case of medical cannabis, however, this direct interaction value doesn’t really apply.

(2)       Value of Direct Network Effects

= Value from Being Able to Interact with Other Users

Validation Value

Third, there’s the validation value of the technology. When more people have already adopted a technology, then new adopters can be more assured the technology actually provides value to users. In the case of medical cannabis, when more people are using cannabis to treat their medical conditions, then new users can feel more confident that cannabis is, in fact, safe and effective for medical use.

(3)       Validation Value

= Confidence that Technology Will Provide Value Advertised

Value of Complementary Products and Services

And fourth, there’s the value to users of having a large variety of products and services available that complement or enhance the experience provided by the base technology. As more users adopt the technology, the increasing base of users attracts new suppliers to the market who provide complementary products and services to the stock of users. Increases in the value of a technology associated with increasing availability of complementary products and services are called indirect network effects. These complements can enhance the consumption experience of the base technology through any of the pathways just described (i.e., (1), (2), or (3)).

In the case of medical cannabis, more people will be likely to adopt when there are more complementary products and services available to enhance the basic cannabis consumption experience. Complements for medical cannabis include, for example:

  • Third-party services that ensure product safety and quality, such as lab testing, clear product labeling, and quality certification
  • Knowledgeable budtenders, genetic testing, and other methods that help patients find products best-suited to their particular needs
  • Availability of convenient purchase options, such as the ability to use cash or credit cards
  • Availability of different kinds of cannabis offerings, in both varieties of compounds, forms of ingestion, and modes of delivery that increase cannabis absorption and bioavailability

(4)       Value of Indirect Network Effects

= Value of Complementary Products and Services Available

Evolution of the Value of Medical Cannabis to Users

Inherent Value of Technology

The first value component is the inherent value of the technology, that is, how well users expect cannabis to treat their medical conditions, net of the purchase costs and expected risks.

We’re interested in the expectations of potential adopters regarding the financial and medical costs and benefits of medical cannabis. Since potential medical cannabis adopters will be using cannabis as a medication, their point of reference is likely to be the traditional healthcare system. In regards to medication, the traditional healthcare system involves four main constituents: government, physicians, pharmacists, and health insurance companies.

Government (FDA)

The FDA is the arm of government responsible for medications. The primary mission of the FDA is to “ensur[e] “the safety, efficacy, and security of human and veterinary drugs, biological products, and medical devices…” The FDA ensures safety, efficacy, and security by strictly regulating which medications are allowed on the market, how they’re manufactured, and how they’re prescribed for use by patients.

Patients trust the FDA to ensure the medications they use are safe and effective. Most cannabis medications are not, however, FDA-approved. In this case, medical cannabis patients will need some other assurances that the medical cannabis they use will be safe and effective.

The cannabis industry is still in its early stages of development. Most states that have legalized cannabis for medical use do have testing requirements to establish safety of cannabis supplies. However, testing requirements vary from jurisdiction to jurisdiction, and firm protocols have not yet been established. Furthermore, many studies reveal large discrepancies between labeled contents and actual contents of sampled cannabis products.

As the industry evolves, two mechanisms will evolve for assuring users cannabis products are safe. First, state governments will establish and enforce testing protocols that generate more consistent testing results. Second, individual brands will use recognized, third-party, certification methods to ensure product safety and quality.

Next comes efficacy. Cannabis’s classification as a Schedule I drug means it “has no currently accepted medical use in treatment in the United States.” Eventually, the Federal government will reclassify cannabis, perhaps as a Schedule II or Schedule III drug. The reclassification of cannabis will foster cannabis activity on two fronts. First, people who have been afraid to try cannabis because it’s considered dangerous will now be assured by the government’s rescheduling that cannabis is, indeed, safe and efficacious, and they will then be willing to try it. And second, people who have been deterred from participating in the cannabis market due to fear of government reprisal (banks, investors, employers, hospitals, etc.) will now be free to participate.

Physicians

In the traditional healthcare system, patients rely on physicians to ensure them of a medication’s safety and efficacy. Physicians, in turn, rely on the FDA medication approval process for ensuring medication safety and efficacy. More specifically, the FDA approval process yields studies establishing efficacy and dosing practices to guide physicians in prescribing medication to patients. Currently, there are relatively few clinical trials establishing the safety and efficacy of cannabis use, and there are only a couple of FDA-approved cannabis medications. The guidance the FDA normally provides physicians regarding usage and dosing is thus lacking for physicians when it comes to most (i.e., dispensary-sourced) cannabis use.

New clinical trials are currently either planned or in process. Additional clinical trials will continue to be conducted in the future, as scientists understand more about our endocannabinoid systems and how cannabis can be used to treat medical conditions. And results from clinical trials will continue to increase guidance for physicians regarding the usage and dosing of cannabis to patients. As information is amassed, more physicians will feel comfortable prescribing its use to patients.

Pharmacists

In the traditional healthcare system, patients rely on pharmacists to dispense medication and guide patients on use. Because pharmacists are certified, patients trust their guidance. Patients who use one of the FDA-approved cannabis medications will follow this same path.

However, patients who purchase cannabis in dispensaries interact — not with pharmacists — but with budtenders. Especially when patients’ conditions are more serious, their risks of using cannabis are higher. In these cases they will want budtenders they can trust; budtenders who become certified are more likely to have the credentials and knowledge needed to gain patient trust. Eventually, credentialed budtenders will become a competitive requirement for higher quality dispensaries.

Health Insurance Companies

In the traditional healthcare system, patients rely on insurance companies to pay for prescription medications. Insurance companies currently tend to cover the costs of cannabis pharmaceuticals approved by the FDA. However, cannabis products sold in dispensaries are not FDA-approved and thus not covered by insurance. In jurisdictions where cannabis is legal for recreational uses, cannabis sold in dispensaries may be considered over-the-counter. In this case, insurance companies generally would not cover the costs.

Insurance companies will most likely continue to cover only FDA-approved cannabis pharmaceuticals but will not cover cannabis sold in dispensaries. The cash price of cannabis for most medical users is probably greater than the average insurance copay, perhaps as high as several hundred dollars per month; many may find the price unaffordable. The price of cannabis sold in dispensaries may decrease over time as the market settles, as competition heats up, and/or as jurisdictions moderate some of their tax rates on cannabis. However, it’s quite possible that cannabis sold in dispensaries will remain unaffordable to lower-income populations.

Validation Value

As more people have started using medical cannabis and the stock of users has grown, they have served to validate cannabis safety and efficacy for potential users who are more skeptical. However, we're still at the very early stages of adoption. As more people continue to adopt medical marijuana, the stock of users will increasingly serve to validate the safety and efficacy of cannabis, thereby convincing more wary users to adopt.

Value of Complementary Products and Services

Medical cannabis users will increasingly benefit from the availability of products and services that complement the basic cannabis consumption experience, as described earlier. Investments have been flooding the market for new cannabis technologies at every level of the supply chain: cultivation, curing, extraction, manufacturing, packaging, forms of use, methods of delivery, sales, and patient use. The market for complementary products and services is thus set to explode in coming years.

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