What do the following industries have in common: rental cars, DVD rental, deli meats and hand soap?
Many would quickly point out that these are four mature, competitive categories. Asked if these are industries they’d choose to enter, our hunch is that most managers would decline. And yet, despite the assumption of slow growth and price-sensitive competition, each of these categories has recently seen a dynamic new entrant achieve success. I'm talking specifically about Zipcar(rental cars); Netflix(DVD rental); Kraft Foods'Lunchables (deli meats); and Method (hand soap).
Dumb luck? We don’t think so. Each of these companies followed a proven path for successful innovation.
Typical of new innovations, the aforementioned products were, at first, not good enough for most people to use. Some were too limited, some too technically demanding, and others too inconvenient or expensive.
The early days of many great products that ultimately gain mass acceptance are spent serving a small number of the most eager customers. Think of the early PCs. Indeed, they were truly just toys and hardly up for the tasks of engineers or executives.
However, over time, as performance improves and demand grows, additional players typically take root, servicing various aspects of the emerging demand. Players compete by relentlessly moving upmarket, serving the most demanding market tiers with ever-more sophisticated, higher-margin products. Inevitably, companies’ abilities to add performance outpaces consumers’ ability to take advantage of such performance. Many MicrosoftOffice users use mere fractions of the features afforded by the latest versions of Excel and Powerpoint, for example.
The consequence of this dynamic is that consumers are ever-less willing to pay higher prices for additional performance they cannot use. Categories commoditize. Competition turns bearish and cost-based.
Until, that is, someone comes along and changes the rules of the game by offering a new definition of “performance” and fresh basis for competition. This is precisely what Zipcar, NetFlix, Method and Lunchables did in their respective categories. In each case they realized that demand as currently defined by the industry was neglecting emerging demand that was ripe for innovation:
- “I need a car for just a couple hours to do some things around town.” – Zipcar
- “Why should I go to a store when I want to watch a movie?” – Netflix
- “I need a quick, easy, healthy solution for my child’s lunch.” – Lunchables
- “I want things in my home to have a sense of style – a reflection of me.” – Method
Zipcar and Netflix pioneered entirely new business models in their categories, and all four of these brands developed solutions that were marketed squarely to emerging demand that established competitors were ignoring.
So the next time you hear someone bemoan the pains of price-based commoditization, change the conversation. Ask, “How can we change the basis of competition to differentiate and win? Are there pockets of emerging demand – customer jobs that are poorly served – that we can exploit?”
Innovation opportunity is in the eyes of the beholder: managers who challenge themselves to “see differently” can identify emerging demand, and win.
Taddy Hall is senior vice president of Global Practices and Consulting Services at Nielsen.