Finding your innovation sweet spot

Most new product ideas are either uninspired or impractical. So how can developers hit the innovation sweet spot--far enough from existing products to attract real interest but close enough that they are feasible to make and market? They can apply five innovation patterns that manipulate existing components of a product and its immediate environment to come up with something both ingenious and viable, say the authors. The subtraction pattern works by removing product components, particularly those that seem desirable or indispensable. Think of the legless high chair that attaches to the kitchen table. The multiplication pattern makes one or more copies of an existing component, then alters those copies in some important way. For example, the Gillette double-bladed razor features a second blade that cuts whiskers at a slightly different angle. By dividing an existing product into its component parts--the division pattern--you can see something that was an integrated whole in an entirely different light. Think of the modern home stereo--it has modular speakers, tuners, and CD and tape players, which allow users to customize their sound systems. The task unification pattern involves assigning a new task to an existing product element or environmental attribute, thereby unifying two tasks in a single component. An example is the defrosting filament in an automobile windshield that also serves as a radio antenna. Finally, the attribute dependency pattern alters or creates the dependent relationships between a product and its environment. For example, by creating a dependent relationship between lens color and external lighting conditions, eyeglass developers came up with a lens that changes color when exposed to sunlight.     

Price promotions and “freemium” app monetization

The “freemium” model for digital goods involves selling a base version of the product for free, and making premium product features available to users only on payment. The success of the model is predicated on the ability to profitably convert free users to paying ones. Price promotions (or “sales”) are often used in freemium to induce this conversion. However, the causal effect of exposing consumers to such inter-temporal price variation is unclear. While sales can generate beneficial short-run conversion, they may be harmful in the long-run if consumers inter-temporally substitute purchases to periods with low prices, or use them as signals of low product quality. These long-run concerns may be accentuated in freemium apps, where the base version is sold for free, so that sales form extreme price cuts on the overall product combination. We work with the seller of a free-to-play video game to randomize entering cohorts of users into treatment and control conditions in which promotions for in-game purchases are turned on or off. We observe complete user behavior for half a year, including purchases and consumption of in-game goods, which, in contrast to much of the extant literature, enables us to assess possible substitution over time in consumption directly. We find that conversion and revenue improve in the treatment group; and detect no evidence of harmful inter-temporal substitution or negative inferences about quality from exposure to price variation, suggesting that promotions are profitable. We conjecture that the zero price of the base product that makes its consumption virtually costless, combined with the complementarity between the base product and premium features can help explain this. To the extent that this holds across freemium contexts, the positive effects of promotions documented here may hold more generally.