Speeding High-Tech Producer, Meet the Balking Customer

In the mid-1980s, I purchased my first car (a Honda Civic) and my first personal computer (an IBM PC AT) at about the same time and for about the same price ($6,000 to $7,000; the price of the computer included a monitor and a printer). Both products were what economists call “durable goods.” Both were used in larger systems consisting of the user, complementary products, and infrastructure. Both required me to master complex user interfaces and protocols. And, in both cases, the manufacturers followed up the initial models with a sequence of “new and improved” versions. My experiences owning and replacing the two were, however, very dissimilar.

An annual stream of new and improved Civics notwithstanding, I used my car for eleven years, for the most part with satisfaction, and easily disposed of it for just under a third of the original purchase price. As basic transportation goes, the new car I purchased as a replacement was not much more superior, but it was much more expensive and, given the rate at which car prices were rising, I was glad I replaced my car when I did and not later.

My experience with the personal computer was very different. I could barely squeeze three years out of it (not because the computer itself was wearing out, but because soon it was not powerful enough for me, my software, my display monitor, or my colleagues). At the end of three years, I had to practically give it away, and when it came to a replacement, I looked at the stream of cheaper, even newer, and even more improved computers, monitors, software, printers, and so on, reflected on my experience, and tried my best to put off the purchase. I felt as if I were playing a game that I the consumer could never win. Regret (over my past purchase), hesitation (over a replacement purchase), and anxiety (about future trends for all the different components of the system) seemed the only outcomes of which I could be sure. I was, to put it mildly, not happy.

I suspect I am not the only consumer who feels somewhat helpless when coping with the steady stream of even newer and even more improved personal computer-related products. Consider this quote from the Wall Street Journal:

In the beginning, there was Microsoft Word 1.0, and it was good. But it wasn’t perfect. So Microsoft Corp. developed upgrades: Word 2.0, 3.0, 4.0, and 5.0.

Microsoft isn’t alone. The entire software industry has embraced upgrades with a devotion to the “new and improved” that would shame a soap maker. . . .

While such upgrades usually include many worthwhile features, consumers increasingly are balking at trading up. “A lot of people don’t need to upgrade as often as the vendors offer upgrades,” says . . . [the] president of the Boston Computer Society. . . .

“[I]t seems to me upgrades are nothing but bad news,” says . . . [the] director of information technology for [one of the divisions] of Hercules, Inc., Wilmington, Delaware. She complains about the complex process of exchanging every user’s old disks for new ones and the time it takes to teach users about new features.1

In the more than five years that have elapsed since that story, computer hardware and software suppliers have not slowed the pace of new and improved offerings. According to a New York Times article:

Every few months there’s a new generation of something — hardware or software that increases the speed or power of a computer system. Advertisements trumpet each breakthrough and it’s left to consumers to determine whether the additional power is worth the investment.2

That determination is not easy, given the multicomponent nature of computer systems, the “standards still being established” phase of the industry, and the fact that the different system components follow their own equivalent of Moore’s law (“computer chips double in power every [eighteen months, revised in 1975 to] two years”). The demand consequences for new and improved hardware and software are worrisome. Business Week noted:

Will the mass movement of computers into homes be stymied by consumers’ fears that whatever they buy will instantly be out of date? [A reader in Dallas] wonders, is technology changing so fast that “the cart is going downhill faster than the horse?” 3

While the case of computer hardware and software is the most compelling, the sense that “the cart may be going downhill faster than the horse” extends to other product categories as well, many but not all revolving around the increasingly ubiquitous microprocessor. Take the telephone, the food processor, the camera, the home entertainment system, the office copier, or factory automation equipment. All durable goods, all used in a system environment, and all being continually and significantly improved as rival designers try to outdo each other at putting microprocessors to greater and smarter use. Have you ever sensed that no sooner have you purchased one version of a product, learned how to use it, and acquired the necessary accessories, that there is an even newer and even more improved version, often at an even lower price? And what has been your reaction? If the answers are, “Yes” and “Not happy about it,” then you are not alone. According to a Wall Street Journal article:

In the face of a touch-tone tidal wave, many of the nation’s dialers are refusing to scrap their rotaries for the latest Trimline or cordless phone. “I just prefer to keep things slower,” explains [an Atlanta resident with nine rotary phones]. “I don’t like how things get faster and faster.” 4

As I reflect on these examples, three questions come to mind. One, what would explain the consumer reactions suggested in the examples? Are consumers just being unreasonable, or is there a substantive basis for their reaction — a basis that can be conceptually articulated? Two, are there any generalizable implications in terms of consumer reaction — implications that producers who are racing to introduce new and improved versions of products should bear in mind? And three, what, if anything, can producers do to mitigate the negative reactions suggested by the examples?

Why Consumers Care about the Pace of Improvement

Consider a high-tech (in particular, information-technology-intensive) product that has been on the market for some time. When introduced, the new and improved version is indeed improved: if consumers could make a fresh choice — a choice unencumbered by investment in or habituation with the existing version — then they would pick the new version over the existing one. The producer has set the other marketing mix variables such as price, distribution, and communications to support such a choice.

A better product with the right price, distribution, and communications — the pieces seem to be in place for an enthusiastic market response to the new and improved version. Or are they? Specifically, does it matter how soon after the existing version the new one is introduced? And why? To answer these questions satisfactorily, we must understand the nature and durability of the consumer’s investment in the product and, importantly, the overall system in which the product is used.

Durable Investments in Products — and Overall Systems

The products I cited earlier — computer hardware and software, telephones, food processors, cameras, home entertainment systems, office copiers, factory automation equipment, and so on — have a number of things in common:

1. They are all durable products that consumers expect to use repeatedly over an extended period. When consumers purchase these products, they make a long-term investment and, in return, acquire the right to a long-term consumption stream. The consumption stream has maximum value when the product is new but goes down as the product gets older. (With a finite product life, there are fewer remaining consumption possibilities, and, in any case, product performance may deteriorate with use, consumer needs may grow, and/or consumers may get bored with the old and start craving something new.)
2. Many of these products are used not in isolation but with one or more complementary products in integrated, multicomponent systems (for example, computer hardware and software, cameras and lenses, amplifiers and speakers, copiers and printers as nodes in an office local area network, and factory automation equipment as part of a computer-integrated manufacturing system). To use the products effectively, consumers must invest in other system components as well, and this investment can exceed the investment in the product itself. For example, in 1980, I purchased a single-lens reflex camera body, a Nikon FE, for $250; my total investment over the next three years in lenses, filters, and converters was more than $1,000.
3. Getting a multicomponent system to work properly almost always requires more than just placing the individual components next to each other. The consumers must define interfaces, make connections, establish compatibility, and often exchange information. Putting all this together may entail additional investment, not only financial, but also investment of time, energy, and other organizational resources.
4. Most of the products in question require human operation, and, recent emphasis on user-friendliness notwithstanding, ease of use is not a particularly strong point for these products.5 The average consumer often must spend significant time, energy, and occasional frustrated moments in learning — let alone mastering — how to use the product as well as other system components. These learning costs, high enough in the single-user case, quickly escalate in a multiuser organization and dwarf the initial investment in the product itself. Citing a Gartner Group Inc. study, a Business Week article states: “The initial purchase price of a corporate personal computer accounts for only 10 percent of its lifetime cost. The rest: troubleshooting, administration, software, and training.”6 Throw in the telephone, fax, copier, printer, projection system, even the coffee machine, and very soon you are talking about a substantial investment in something very intangible — the ability of an organization’s employees to use these productivity-enhancing resources.

All four points have major implications for how consumers respond to a new and improved product version.

How Consumer Segments React to Product Improvements

Let us begin with a case where only the first of the above four points applies: we have a durable product that can be used without any additional investment in complementary products, user learning, or system infrastructure. What happens when the product supplier introduces a new and improved version? Will consumers purchase the new version, or will they hesitate?

The answer depends, among other things, on whether a given consumer is an adopter of the existing version, an adopter of a competing version, or a nonadopter (who is purchasing into the given product category for the first time). The nonadopter’s decision is the easiest to analyze. By assumption, the new and improved version is indeed improved, and, given the absence of any past ties with the product, nonadopters can decide on the new and improved version on its own merits and purchase it if their valuation of the product exceeds its price and not otherwise.

The existing-version adopter’s reaction to the new and improved version depends not only on the amount of improvement but also, significantly, on the length of time since the introduction of the existing (pre-new and improved) version. The existing-version adopter cares about the amount of improvement and the pace, or speed, of improvement (the ratio of amount of improvement to the interversion time).

Say the existing-version adopter purchased the product when it was introduced, at t = 0. By purchasing the product, he or she acquired the rights to a consumption stream. Let the value of the stream at time t be u(t). For most products, u decreases over time (see Figure 1)7: the consumption stream has maximum value (u(0)) when the product is new but goes down as the product ages.

Of course, the consumer does not secure the consumption rights for free: he or she must purchase the product, which costs r (note: u(0) ≥ r; otherwise, the consumer would not have purchased the product in the first place). Once the product is purchased, however, the relevant investment in the product is not the price paid at the time of purchase but the proceeds the consumer would realize if he or she were to dispose of the product (the “disposal value”). Like the future-consumption-stream value, the disposal value also typically decreases over time (see Figure 1: “disposal value (d ) ”). The difference (u(t ) – d(t ) ) measures the consumer’s expected surplus — the difference between the value of the future consumption stream and the contemporaneous investment in the product at time t.

Some comments on the shapes of the curves represented in Figure 1 are in order. First, there typically is a significant drop in a product’s disposal value at the time of purchase. The drop (r – d (0+)), where d (0+) is the disposal value just after purchase, represents the premium that consumers pay for a “new” product, be it a refrigerator, a computer, a car, a machine tool, or whatever; the acquisition loses a chunk of value the moment it is out the merchant’s door and out of the packing box. Second, while the actual curves may be different from those represented in Figure 1, the gap between the value of the future consumption stream and the disposal value gets smaller as the product ages.

Figure 1 is useful for understanding the existing-version adopter’s reaction to a new and improved version of the product. Say the value of the future consumption stream for the new version when introduced is v and the version is offered at price p. By assumption, the new version is genuinely improved (v > u ( 0)) and is priced so that if consumers could make a fresh choice, they would then choose the new version over the existing version: v – p > u (0) – r.

We can then make two observations:

· Observation 1.

Legitimacy of the “new and improved” claim notwithstanding (in the sense I just articulated), owners of the existing version may decide against switching (“upgrading”) to the new version when it is introduced in the market.

Explanation.

Suppose the new version is introduced at time t. An owner of the existing version will switch to the new version only if the benefits of switching exceed the cost of switching, that is, if v – u(t ) > p – d (t ), or, equivalently, v – p > u(t ) – d (t ). But these conditions may not hold for relatively small t. We see from Figure 1 that for small t, it is possible that u(t ) – d(t ) > u(0) – r, and hence v –p < u(t ) – d(t ), even though v – p > u(0) – r.

· Observation 2.

The later the new version is introduced, the more willing owners of the existing version are to adopt the new version.

Explanation.

For relatively large t, the difference u(t )- d(t ) decreases with time. This makes it more likely that the condition v – p > u(t ) – d(t ) will be met.

These two observations lead to an important conclusion: if a new and improved version comes too soon after the introduction of the existing version (in other words, if the pace of product improvement is too rapid), then existing-version adopters may choose not to switch to the new version. They are reluctant to switch not because they do not value the improvement in and of itself, but because, early in the life of the existing version, the benefits from switching are not commensurate with the costs of switching.

The existing-version adopter’s reluctance is perfectly reasonable given that:

• Relatively early in its life (and sometimes for a long time thereafter), the existing version continues to have a satisfactory consumption value for the existing-version adopter.8
• The adopter already owns the existing version — and, importantly, has incurred costs (for example, the “newness” premium that was referred to earlier and other first-time transaction costs) that would not be recovered at the time of existing-version disposal but would have to be reincurred if the adopter were to switch to the new and improved version.
• Allowing for inefficient secondhand product markets and transaction costs associated with the disposal of the existing version, the existing-version adopter may not be able to realize the “true” value of that version over its remaining life.

The import of these three factors is greater in the earlier stages of the existing version’s life and diminishes as the product ages, hence the existing-version adopter’s reluctance to switch to a new and improved version if it comes too soon after the existing version.

This reluctance becomes even more pronounced when, as is usually the case, the user must invest not only in the product but also in complementary products, interfaces, and learning — in other words, when all four product characteristics identified earlier apply. To the extent that the existing-version adopter continues to derive satisfactory consumption value from the entire system — and this value does not significantly increase by switching to a new and improved version of one component of the system — and to the extent that the consumer’s systemwide investment (in complementary products, interfaces, and learning) is neither transferable to the new version nor recoverable from disposal of the existing version, the consumer will be even more reluctant than before to switch.

Two examples illustrate this point. Earlier I alluded to my $1,000-plus investment in lenses and accessories for my $250 camera body. That camera body is “manual” and does not offer all the functionality (autowind, auto-focus, sophisticated metering, and so on) that the newer, smarter, microprocessor-laden “automatic” camera bodies do. The additional functionality is valuable, and I can see myself writing off my $250 investment in the old camera body (after all, I have used it for fifteen years) and replacing it with a new and improved one. I balk, however, once I focus on the entire system of user, camera body, lenses, and accessories. To derive the benefits of autofocusing, I would also need to replace the lenses, and I am not yet ready to write off my $1,000-plus investment in lenses and accessories. In other words, although at the product level, my switching benefits are greater than the switching costs, at the system level, the switching costs exceed the switching benefits; the result: no new camera body.

The second example was the subject of daily media reports at the time I wrote this article (August 1995) and relates to Microsoft’s introduction of Windows 95, the much-awaited upgrade of the market-dominant Windows operating system software. Upgrading just the software from Windows 3.1 (the existing version) to Windows 95 (the new and improved version) may cost less than $100, but that does not include the time and energy the user has to expend unlearning the Windows 3.1 user interface and learning the Windows 95 interface (the two are different). It also does not include the price of a new computer (or of upgrading the old computer’s processor, memory, and other accessories) that owners of older computers will need to avail themselves of all Windows 95 benefits. Once we factor in these systemwide considerations, the real switching cost may be not “less than $100” but more than a couple of thousand dollars.

An article in The Economist cites Computer Intelligence InfoCorp, based in La Jolla, California, which reports that Windows 95 may “not be for everyone” (see Table 1 and cartoon)9:

For the two-thirds of users who do not have . . . [a system with a 486 or Pentium processor and 8 MB or more of memory], the choice is whether to upgrade their existing machines or to buy new ones. Most users could upgrade by purchasing another eight megabytes of memory. However, the price of memory chips may rise as PC makers rush to add memory to all their offerings. There is a chip shortage in the industry already. Add in a new processor, and perhaps a bigger hard disk, and the price of beefing up an average PC to run Windows 95 properly nears $1,000. Many may prefer simply to cough up the $2,000 [for a new Pentium, 16 MB-based PC]. 10

Now, place yourself in charge of computer systems in a large organization, and the costs quickly escalate:

INTECO [of Norwalk, Connecticut] predicts that corporate users will account for just 20 percent of those adding the program to old machines in 1995. Indeed, some in the industry suspect that Windows 95 may never dominate the commercial market. Instead they think many corporate customers will stick with the current version of Windows [Windows 3.1] for the next year or so, and then ignore Windows 95 by going straight to its industrial-strength big brother, Windows NT. While the beefier NT needs even more memory (16 megabytes is a start), it delivers more in exchange: better networking, more reliability, faster operations. 11

The reason corporations have to wait until “next year or so” before directly switching to Windows NT is that Microsoft is porting the superior Windows 95 user interface to Windows NT. One commentator explained, “The real solution is the Windows 95 interface with Windows NT plumbing.”

There is one consumer segment left to consider: competing-version adopters. Their trade-offs are similar to those of existing-version adopters, except that their concern is the consumption value of the competing version they already own and its disposal value if they were to get rid of it. These values have an impact on, respectively, their switching benefits and switching costs as they consider a switch from the competing version they own to the new and improved version they are considering. I shall leave out the details, but the conclusion is similar to that for existing-version adopters: competing-version adopters will be reluctant to switch if the new and improved version is introduced very soon after the competing version.

The Special Case of High-Tech, New and Improved Products

In reviewing my discussion — and notwithstanding the Nikon and Microsoft examples — you could correctly observe that everything I have said so far would apply, more or less, to my car as well as my personal computer (or software, phone, camera, and so on). The four product characteristics identified at the beginning of the previous section cannot, in and of themselves, explain the difference in my experiences owning and replacing my Honda Civic and IBM PC AT.

For that, we must focus on the following differences between the car and the computer. I refer to the personal computer, but my comments can be generalized to apply to other IT-intensive products as well. The differences were at least partially illustrated by the Windows 95 example.

• Although both my 1984 Honda Civic (1984 was the first year of a new model) and my first-generation IBM PC AT were followed by new and improved versions, there were marked differences in the extent to which the respective versions were new and improved. Unlike the car (although with the increasing use of microprocessors in cars, that too is changing), each new version of the PC brought with it a significant improvement in functionality — and, frustratingly but not surprisingly, a precipitous drop in the disposal value of older PCs.
• Consistent with my observation in the previous point, during the eleven years I owned my car, it needed routine maintenance but no major upgrades. (Indeed, except for things such as air conditioning, the sound system, and the security system — none of which had a bearing on taking me from point A to point B — there was not much that I could upgrade.) My computer, by contrast, started calling for major upgrades within months. The result was that the computer, which had cost nearly as much as the car and probably could outlast it physically, effectively had a much shorter life than the car.

• With the passage of time, all I had to worry about in the car was the car itself. I assumed I could get whatever spare parts, mechanics, and fuel I needed to run it. Not much else in the “system” changed significantly. By contrast, in the case of the PC, I had to keep my eyes on many moving targets, each durable in theory but quickly obsolete in practice: the computer itself, random access memory, hard disk space, floppy disk drive size and format, display resolution and quality, printer drivers, operating system software, application software, user and product-product interfaces, and so on. I felt like Alice on the Queen’s croquet field in Alice’s Adventures in Wonderland:

The chief difficulty Alice found at first was in managing her flamingo . . . and, when she had got its head down, and was going to begin again, it was very provoking to find that the hedgehog had unrolled itself . . . and, as the doubled-up soldiers were always getting up and walking off to other parts of the ground, Alice soon came to the conclusion that it was a very difficult game indeed.12

• New and improved models notwithstanding, I could be confident of one thing in the case of the car: driving infrastructure and protocol (habits, rules, and regulations) would not change so fast and so often as to threaten periodically my compatibility with the rest of the world. There might have been changes from one version of the car to the next, but some “meta” standards were in place. I had no such luck with the PC, where generational changes — separated by as little as two years — in different components of the “system” could leave me with two equally unattractive alternatives: upgrade at significant expense or become increasingly incompatible with the rest of the world.
• The term “compatibility with the rest of the world” takes on somewhat different meanings in the two cases. In the car, while I shared the roadway, the fuel source, and the driving protocol with the rest of the world, I typically drove my own car and did not exchange or share with another driver parts of the car or “files” created through the driving process. This allowed for some incompatibilities, as long as they did not interfere with system-level compatibility needs. The computer is very different: I may work on my file on my friend’s computer, my friend may work on my file on his or her computer after I have worked on it on my computer, and my friend and I might share a server and a printer. A different —some would argue, greater — compatibility demand.

All these differences taken together go a long way toward explaining my different experiences owning and replacing my 1984 Honda Civic and my first-generation IBM PC AT. They also make poignant my earlier discussion of the relationship between the consumer’s investment in an overall durable-product-based system and the pace of product improvement. IT-intensive products entail substantial, generation-specific, and not easily transferable systemwide investments. Individual components of the system, each of them a durable product, improve rapidly. The improvements often are not just flashy features but significant functionality enhancements. The consumer — not unlike Alice on the Queen’s croquet field — must make sense of and react to all these improvements.

These differences also suggest the need for a more eclectic definition of the term “pace of product improvement.” Earlier, I characterized pace as the ratio of the amount of improvement and the interversion time (the time interval between the introduction of an existing version and a new and improved version). The definition is less clear-cut once you allow for different dimensions of product improvement, some more critical for a product’s functioning than others. Then, there is the fact that most product improvements are implemented in a product line context, with different types and amounts of improvements being introduced perhaps at different times in different “models” of the product line. How does one measure the pace of product improvement? Finally, competing-product and complementary-product suppliers all play (less than coordinated) new and improved games, further muddling the concept.

The eclectic orientation provides a valuable insight: even though there may be no acceleration in the pace of improvement of any one relevant product dimension for any one system component, the confluence of multidimensional, product line-based, multicomponent changes can, at the level of the system, convey the sense of a faster and faster pace. Thus the beat of Moore’s law may remain two years, but what with one aspect of a product changing now, a second six months later, and different changes being implemented at different times in different models in a product line, and with different suppliers following not-always-coordinated timetables, the effective systemwide pace for the consumer may be less than two years. And, given the competitive imperative to be first to market with a new and improved version of whatever, the consumer may see the pace becoming ever faster and faster.

Durability Revisited

All things considered, how durable are IT-intensive high-tech products? And from whose point of view? The product’s, the system’s, the investor’s, the consumer’s, the producer’s, or the industry’s? Each viewpoint implies a product life, and one reason the pace of product improvement is relevant is that all these lives are different and “out of sync.”

Take the word processing software I used to write this article. In theory, it has unlimited durability. Unlike my car, I can use the software as often and for as long as I like, and it will never wear out. So, that is one life. But I do not use the software by itself; I use it with my computer, an operating system software, a display, and a printer. They have lives of their own, some of which are limited. (Hardware, unlike software, can wear out and is prone to break down eventually.) Consequently, there is a limit on how often and for how long I can go on using the word processing software in the existing system. So, that is a second life, shorter than the first life.

My school purchased the word processing software and the other components of the system; the whole setup cost a bundle. Obviously, the dean is not keen on spending a large sum of money again any time soon. As an investor in the system, he has a certain payback period in mind. Equivalently, if I were working for a for-profit organization, there would be some policy on capital investment depreciation and replacement cycles. So, that is life number three, determined by, among other things, organizational policy and tax rules.

Then there is me, the consumer. On the one hand, I have invested valuable hours jigging the system together and learning how to use the different components — individually and as a system — and I would like to amortize this investment over as long a time as possible. On the other hand, as I get used to what I have, as my needs grow, and as I hear about all the new and improved versions of system components, I want to upgrade. There is a tension between the two preferences, a tension that would only be accentuated if I also had a financial investment in the system. Once I resolve this tension (assuming that I can), the result is a fourth measure of product — and system —life, which may be different from the first three measures.

Next is the supplier who, given technological trends, in-house research and development efforts, and a broad set of other considerations, determines when to introduce a new and improved version and how new and how improved it will be – in other words, the nature, amount, and pace of product improvement. These decisions, in turn, imply a life — number five — for the existing product version.

Finally, like the Queen’s croquet field, not just one component of the system is changing. Competing and cooperating suppliers in the industry are introducing new and improved versions, which collectively feed back to all the above lives. The resulting life is number six.

If all six lives — and there may be more — were of equal length and perfectly synchronized, then there would be no need for this article. The problem is, they are not. Because of improving quality, life, strictly from the product’s viewpoint, is getting longer. Because of increased product complexity and growth in number of applications and users, lives from the investor’s and consumer’s viewpoints are also getting longer. Meanwhile, because of technological progress and intense competitive pressure to be first to market with an even newer and even more improved product, lives from the system’s, producer’s, and industry’s viewpoints are getting shorter.

So, in summary, existing systems have increasingly satisfactory consumption values. Investors and consumers have larger outstanding investments in existing systems. Frequent introductions of new and substantially improved versions of different system components drive down disposal value. Meanwhile, new and improved versions continue unabated.

Impact on Consumer Attitudes, Expectations, and Purchase Behavior

Let us now consider the impact of the rapid introduction of new and improved versions on consumer attitudes, expectations, and purchase behavior. Four questions, from the consumer’s viewpoint, help structure the inquiry:

1. What should I do about the new version that has just been introduced?
2. If I had known that the new and improved version would be coming out so soon, would I have chosen differently in the past?
3. What will I do the next time around?
4. How do I feel about all of this?

Hesitation 1

Of the four questions, the first is the easiest to answer, and the two consumer segments that will have the greatest struggle over it are the existing-version and competing-version adopters. Both segments own a working version of the product, which has a disposal value no doubt (which lowers their cost of switching to the new and improved version), but which also has a residual consumption value (which lowers the benefits from switching). My earlier analysis suggests that if the new and improved version comes too soon after the existing or some other competing version, then these consumers may decide that it is in their economic interest to keep the version they already own rather than switch to the new and improved version. For them, at that early stage in the life of the version they already own, the switching costs may outweigh the switching benefits, and they will put off purchase of the new and improved version until some future date. Their hesitation has nothing to do with remorse or regret over past actions; it is the result of hard-headed, rational decision making.

There are several ways the new and improved version producer can get existing- and competing-version adopters to reduce their hesitation. One way is to reduce the switching costs. The producer can aggressively lower prices for the new and improved version. Software vendors, for example, provide special price deals for consumers who are upgrading from an existing version or switching from a competing product. Or the producer can create or support an active secondhand market to increase disposal value and decrease transaction costs. Hewlett-Packard, for example, offers to purchase people’s existing printers if they switch to one of its newer ones.

Another option is to offer even greater levels of product improvement, thus increasing switching benefits. This is difficult and may also be expensive. More to the point, both this option and the “low price for the new and improved version” option increase the existing-version consumers’ regret over having purchased the existing version in the first place (see next section). It is not in the producer’s long-term interest.

Finally, there is the risky strategy (that some producers resort to) of talking up the new and improved version and talking down the existing one: consumers will perceive higher switching benefits and will be less cognizant of the switching cost.13

Regret

My first-generation IBM PC AT came with 512 KB of random access memory, a 20-MB hard disk, a 6-MHz clock speed, an RGB (red-green-blue) display, and two 5.25-inch floppy-disk drives (one 360-KB and one 1.2-MB). Less than six months after I had purchased it, IBM introduced a faster version with a more capacious hard drive; it was also $500 cheaper. Soon thereafter, the company introduced a new display standard and, two years later, discontinued the AT line and came out with a PS/2 line that had a new internal architecture and at least 640 KB of random access memory, could not accept any of my AT’s expansion cards or display, and came with 3.5-inch floppy-disk drives. Two years after that, Lotus Development Corporation, whose Lotus 1-2-3 spreadsheet software I was then using, introduced a new version of the software, which required 2 MB of random access memory. I could go on, but I have made my point.

My recurring thought as these changes were taking place was, “Wouldn’t I have been better off if I had waited, even for only six months?” The answer depends on the trade-off between the benefits I realized from using the computer in the interim and the greater value I could have derived from a newer version, adjusted for differences in the prices of the two versions and the time value of money and consumption benefits. Given the nonsynchronized changes in other components of the entire personal computing system, analyzing the trade-off is not easy, but there were a number of times when the answer would easily have been, “Yes, I should have waited.”

You probably have your own favorite examples. I am using reported anecdotes, but it seems that such feelings of regret extend to other product categories that involve systems with increased application of microprocessors in particular and IT in general. Regret nevertheless is a real and often powerful human reaction; it can and does influence future action. If nothing else, the consumer may be doggedly determined to hang on to the version he or she already owns and not risk getting burned again.

Hesitation 2

The consumer’s determination to hang on to a product version he or she already owns is predicated on the reasoning, “I invested a lot of time and money in buying the version I have and setting up the whole system, and I am determined not to have the investment come to nothing. I am going to continue using the existing version, come what may.” The determination not to have past investments come to naught leads to hesitation motivated by considerations different from my earlier analysis of switching benefits versus switching costs. Neither the first type of hesitation nor the second bodes well for a producer: if too many consumers balk, demand for the new version will be adversely affected.

Another area in which consumer hesitation is bad for a producer relates to the market segment most likely to put off purchasing the new and improved version. Consumers who find it most advantageous to defer purchase are quite possibly those at the “high end”: they have the greatest value for the product and in whatever improvement being introduced and may be most interested in waiting for the next new and improved version. Unfortunately for the producer, high-end consumers are also those most willing to pay for the product. This may have a detrimental effect on the producer’s ability to price skim — to sell first at high prices to high-end consumers and later at lower prices to low-end consumers. Furthermore, some high-end consumers who are waiting may defect to a competitor, possibly taking their future business with them. Where will the cash flow and market presence come from to fund and launch the next new and improved version?

It is not only existing- and competing-version adopters that the producer must worry about. Nonadopters, on hearing reports of adopters’ regret (over past choices) and hesitation (over present choices) may also hesitate and doom the new and improved version. The nonadopters worry that they will have the same regret when the next new and improved version comes along, thinking that maybe they too should just wait it out.

Anxiety

Consumers’ observations about the pace and nature of past product evolution and stories about other users’ experiences affect their expectations about future evolution and shape their attitudes toward present and future purchases. There are two effects:

• A concern that there will be similar or even more rapid product changes in the future, with repeated need to write off long-term systemwide investments.
• Instability (“The future is uncertain, and I am even uncertain about how uncertain it is”).

The former effect may influence purchase behavior, but at least the consumer can plan for it. The latter, on the other hand, can throw a consumer’s decision making into disarray. The chances of disarray only increase when you allow for the “Alice on the Queen’s croquet field” effect. The consumer must formulate expectations about the evolution of all the elements of a multicomponent system and plan the acquisition of individual components while watching the evolution of the entire system. The number of relevant decision variables, interactions, and scenarios explodes, along with the anxiety level.

Ultimately, anxiety about what the future may hold in terms of new and improved high-tech products —and its adverse impact on expectations and product-purchase decision making — can be even more damaging than regret about the past and hesitation over the present. Anxiety may not turn consumers en masse into Luddites, but it cannot help a producer.

What, If Anything, Can a Producer Do?

Earlier, in discussing hesitation, I suggested a range of possible solutions, none totally satisfactory: (1) aggressive low pricing of the new and improved version (can be restricted to consumers who own an existing or competing version but, taken to its limit, can culminate in an industry bloodbath and result in greater consumer regret); (2) a new and even more improved version (can use up scarce resources and result in greater consumer regret); (3) an active secondhand market (may divert nonadopters from the new and improved version); and (4) talking up the new version and talking down the existing version (causes problems when the truth comes out). I now outline some additional options.

Establish an “Optimal” Pace of Product Improvement

Consumers require time to digest and recoup their durable investments in IT-intensive products and the overall systems in which the products are used. Producers must factor this in when pacing the introduction of new and improved versions.

Factoring the demand-side considerations I detail here into an “optimal” pace of product improvement is no trivial matter. The producer must strike a judicious balance between, on the one hand, the momentum of technological innovation, the imperatives of competition, and the capability of the supply chain to deliver product improvement and, on the other hand, the willingness and ability of the demand side to accept and adapt to change. The producer needs the decision-making processes and discipline necessary to let demand-side considerations have a voice — and not to let decisions on the pace of product improvement be made by default, as an outcome of a no-holds-barred competitive race of technological virility (“Who gets to concept and market first with an even newer and even more improved version?”).

In today’s business environment, not only are the competitive pressures in the concerned industries greater, the stakes larger, and the windows of opportunity smaller, but the supply side has also worked hard to deliver the rapid product improvement that the business environment supposedly calls for.14 Unless there is a deliberate check on speed, it can become the game, with contestants falling over each other to introduce even newer and even more improved products in the market. That check is, “Suppose we can rush a new and improved version to the market. Would the consumers be willing to accept it and adapt to it?” Answering the question requires:

• A constant reminder that it is the total system — the interconnected totality of the product, the relevant complementary products, the user, all the relevant interfaces, and the appropriate rules and communications protocol — that the consumer cares about, and it is the total system that is relevant to determining the consumer’s response to the new and improved version.
• Information on the relative sizes of the various consumer segments (in particular, existing- and competing-version adopters and nonadopters) and a dynamic understanding of existing- and competing-version consumers’ residual consumption value and disposal value curves at the system level.
• Conceptualization and working measures of the different “lives” I characterized earlier.
• An appreciation of the interactive effect of past experience and future expectations on a consumer’s attitude toward and purchase of a new and improved version.

The discussion of regret suggests a test for the pace of product improvement. The pace is “too fast” if all or most consumers see the product as improving in “present value terms”: the present-day discounted consumption value of an anticipated new and improved version exceeds the consumption value of the existing version. Consumers, not wanting to regret their choice when the new and improved version comes out, will be tempted to hold off purchase of the existing version.

My comments on the optimal pace of product improvement relate to the time interval between consecutive product versions and not to the speed at which a product concept is brought to market: once a new and improved version is conceptualized and the above “deliberate check” conducted, then the producer must bring it promptly to market. Similarly, once a concept is articulated, it is good strategy to have a new and improved version ready for launch at an appropriate time. Rapid product development and speedy market introduction make the organization nimble, responsive, and efficient.

Stimulate Demand and Capture Market Share

I have focused here on the existing-version consumers’ (the installed base’s) reaction to the pace of product improvement. If, in the relevant consumer population, the installed base is small, then maybe it is less consequential that the installed base reacts adversely, the argument being that the new and improved version may induce competing-version adopters to switch and/or may stimulate significant new demand among nonadopters. In such instances, rapid product improvement may, in fact, be prudent.

Even when the existing-version installed base is not small, there may be a defensive argument for rapid product change: “If we don’t do it, the competition will, and our installed base may defect to the competitor’s ‘new and improved’ product.” This argument has merit and, indeed, competition is one of the strongest motivators in the race for speed; every producer wants to leapfrog every other producer.

The problem with this scenario is that on the one hand, racing ahead with a new and improved version is seen to be critical for survival, let alone competitive success, while on the other hand, an industry cannot be well served if a large number of consumers put off product purchase and end up regretting past purchase decisions. The tendency to postpone purchase is particularly worrisome because of the negative impact on initial sales of and profit margins from the new version. The negative impact comes at a critical time — when individual producers need more and more resources to fund faster and faster product development.

Offer Modular Upgrades

Perhaps the best way to sustain a rapid pace of product improvement and yet not have the installed base suffer and consumers defer purchase is to offer modular upgradability. This allows existing (and future) version owners to selectively upgrade the version they own rather than dispose of it entirely to purchase a new and improved version. Modular upgrades can make consumers more flexible with respect to their investment in a durable product and can be targeted at consumers who most value the upgrades. Modular upgrades are an especially attractive solution when there is a growing disparity between the product’s various “lives.”

One problem with modular upgrades is that they disaggregate the product, which consumers and competitors may increasingly see as an assemblage of “plug and play” components rather than as an integral entity. There is nothing inherently wrong with this, but once an empty socket is created, the module that is plugged in may also be supplied by a competitor. Plug-and-play easily leads to mix-and-match, and consumers may mix different producers’ modules.

Phase Product Improvement into a Product Line

Producers introducing new and improved versions of high-tech products can avoid some of the pitfalls I’ve alluded to by availing themselves of a product’s multidimensional nature. Consumers typically are heterogeneous in their preferences for and valuation of different product dimensions. It may be possible to pace and phase improvements along individual dimensions so that any one consumer group does not see the specific improvements from one product version to the next as being too rapid.

For example, Nikon initially introduced its “N” series camera bodies in 1985. The first in the series, the N2000, offered a built-in motor drive for winding film. The second, the N2020, was introduced in 1986, at the same time as a new series of autofocus lenses; it provided the first autofocus capability to Nikon’s “amateur photographers” market segment. In 1987, Nikon launched the N4004, an “entry-level” camera body with an improved autofocus module. In spring 1988, there was the N8008, a camera for the higher-end segment, which introduced “matrix metering,” a new form of microprocessor-assisted metering. Finally, in fall 1988, Nikon introduced the top-of-the-line professional F4 with all of the above improvements and more.

Conclusion

I have in my shirt pocket my father’s thirty-five-year-old fountain pen. In the years since its purchase, the pen’s manufacturer has introduced many new and improved versions, but, in terms of writing, there is nothing my pen’s newer cousins can do that it cannot. Moreover, the pen slides into its customary position between my fingers as I start to write, and its nib has been sculpted through so many uses that it glides over a sheet of paper. In a very deep sense, I am accustomed to the pen and I have a certain security resulting from that knowledge.

I value that security as I struggle to master my other word processor, the software package I used to write this article. I thought I had succeeded, until I recently upgraded the software. Installing more than thirty shrink-wrapped disks on my computer’s hard disk took forty-five minutes. Then I had to customize the new version, a hopeless task since I don’t remember all the preference settings from the previous version. Next I discovered that my laptop did not have enough memory to run the software. The final blow — the software insists on placing random page breaks on pages with footnotes; I cannot solve the problem, and neither can the supplier’s Help desk. I spent over an hour forcing page breaks in this document before it looked right, and I am afraid to make changes. This is version 6.0 of the software, developed by the industry titan.

Yes, I crave the security of my fountain pen as I cope with some other products in my life: computers, software, telephones, “home entertainment systems,” office copiers, and so on. To be sure, I value many of the improvements in new versions of these products, but frequent improvements result in my having to junk entire systems that are in otherwise perfect working order. They require me to learn, unlearn, and learn differently how to use the consecutive versions. And they leave me confused, with fewer and fewer reliable algorithms for planning.

A Price Waterhouse survey of 300 British businesses, quoted in Business Week, noted:

71 percent [of the respondents] indicated that while uncertainty was not a problem five years ago, it has become a major one . . . today. . . . 39 percent [of the respondents] said they are dealing with computer confusion by simply avoiding purchases . . . .

There’s a message in that statistic to send chills down the spines of computer-industry executives: Unless computer confusion is cleared up, they risk a serious sales slowdown. . . . . “Any time there’s confusion, there’s the opportunity to delay a buying decision . . . ” says Intel Corp. Senior Vice President David L. House.15

Maybe consumers need the greatest help in clearing the confusion and planning for an uncertain future.