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Working Paper

The Market Evolution and Sales Take-off of Product Innovations

Rajshree Agarwal and Barry L. Bayus, 2002 [02-111]

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Empirical research and observation have shown that the early market evolution of consumer and industrial product innovations follows a predictable course: a period of slow growth immediately after commercialization followed by a sharp increase, or take-off, that corresponds to the first large increase in sales. Understanding the timing of this sales take-off is critical for industry analysts and managers since it influences the allocation of resources to R&D, product development, marketing, and manufacturing.

Conventional wisdom views price as the key explanatory variable in determining sales take-off time. According to this perspective, sales for a product innovation are initially low due to the product's relatively high prices; as prices decline over time, however, the new product crosses a threshold of affordability and sales take off.

Study and Findings

In this report, authors Agarwal and Bayus argue that shifts in demand as well as supply curves lead to market take-off. They identify product improvement as the key factor in the diffusion and sales take-off of new products.

To provide empirical evidence, they explore the relationship between take-off time, price decrease, and firm entry for a sample of 30 consumer and industrial product innovations commercialized in the U.S. over the past 150 years. They find that firm take-off systematically occurs before sales take-off and that new firm entry and the demand shifts during the early evolution of a new market that result from non-price competition dominate other factors in explaining observed sales take-off times.

Based on their findings, the authors propose a revised narrative for the market evolution of a product innovation, as follows: a long incubation period ensues after the pioneering invention, eventually followed by the commercialization of various specific product forms or models by one or more firms (either small or large). As the new market evolves, the activity of competing firms legitimizes the product innovation as a real opportunity, and the number of firms competing in the new market increases. As a result, supply-side capacity increases. Demand also increases as the aggressive, non-price competition that occurs among incumbents and entrants in the new oligopolistic market focuses on demand-enhancing efforts such as R&D directed toward product improvements. Depending on the specific product innovation and the nature of its supply and demand curves, prices either decrease or increase. More importantly, consumers respond to this competitive activity and accept that the product innovation provides real benefits over existing products. As a result, sales take off. After this, both sales and the number of competing firms continue to increase but at a less dramatic rate. Eventually, there is a shakeout of firms in the industry, and the number of competitors drops and then stabilizes.

Managerial Implications

These findings are good news for managers since they suggest that sales growth does not have to come at the expense of the compressed profit margins typically associated with declining prices. However, these results also suggest that it may be very difficult for a single firm to significantly reduce the time to take-off for a new product. While individual firm decisions on advertising expenditures, distribution policies, and product development may influence their own brand sales, the collective marketing efforts of competitors seem to be the driving force for market growth and take-off. This suggests that monopolies dampen the growth of new markets and that competing firms work together to influence the take-off of a product innovation.

With an eye towards identifying the factors related to a swift sales take-off, future research should thus empirically and analytically investigate the nature of firm alliances and collaborations during the formative stages of a new market.

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Working Paper Series 2002

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