Companies seeking to capture value from digital innovations often release improved versions of their current products. However, there is a downside to this strategy as upgrading products can alienate customers who have already invested a great deal of time and effort in getting used to a particular operating system. A study titled “Growing Pains: The effect of generational product innovation on mobile games performance,” conducted by a professor from Singapore Management University (SMU) and his co-researchers, has implications for our understanding of digital transformation in general. The study found that digitizing production processes and business models inevitably involve upgrades and iterations, but it also shows that the iteration process may have a downside.
The paper argues that while product upgrades, referred to as “generational product innovation” (GPI) in the article, are released with the intention of capturing value, “they may also impose learning costs upon customers which can be value destroying.” Although product upgrades are deployed within a wide range of industries, the study focuses on mobile app games in particular, in part due to access to data from 58 countries held by an analyst firm in the mobile intelligence sector.
The researchers conducted interviews with several app developers, with one describing upgrading as “a question of life and death for a mobile game, because users would get bored playing the same game within a month. The best way to survive is to update new content regularly.” Another developer stated that major updates “have the highest potential to generate revenues.”
However, the study found evidence of a dark side, which can be particularly damaging for firms that initiate numerous changes. This negative effect, though, does not tend to be so damaging for market leaders. The study’s methodology employs a difference-in-differences (DID) approach, in which the researchers compared the performance of almost identical apps, with the upgraded version released first on a different platform than the previous version.
The paper points out that “scant attention has been paid to the changes that innovations may impose on customers and the fact that customers may have natural resistance to such changes.” The researchers found that the upgrading process can impose learning costs on customers, which can result in customers becoming overwhelmed and ditching the app before realizing any long-term benefit.
The issue is that whenever a product is upgraded, it creates a window of opportunity for competitors to take advantage of. Whenever a major upgrade is released, that will hurt the performance of the app in the short term until users feel the benefits outweigh the costs. Products and generational innovation have lifecycles, and the more a company innovates, the more likely it is that they will be exposed to risks. Competitors might be able to take advantage of this and gain more users from the company by releasing promotions, just as users are experiencing disruption.
The study’s lead researcher, SMU Associate Professor of Strategy and Entrepreneurship Chen Liang, said that while there is clearly a long-term benefit to generational innovation for companies, from the users’ point of view, at least in the beginning, they probably would become overwhelmed by short-term costs or adjustments. They need to tolerate these and not become overwhelmed; otherwise, they’ll probably ditch the app before realizing any long-term benefit.
Digital transformation brings benefits as iterating software is much less costly and faster than upgrading hardware. However, companies need to be careful in their strategy of upgrading products as it may alienate customers who have already invested their time and effort in a particular operating system. The upgrading process can impose learning costs on customers, which can result in customers becoming overwhelmed and ditching the app before realizing any long-term benefit. Therefore, companies need to ensure that they communicate the benefits of upgrading to their customers while also taking necessary precautions to minimize the negative effects of the upgrading process.
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