Literature review: Why do saddles in diffusion occur and what should managers do about them?

1. Introduction
The theory of diffusion of innovations has had great influence over the academic study and the practice of marketing in the past half a century. The theorys implications extend to various areas of the marketing discipline, such as advertising, product development, and measurement of marketing effectiveness. It has become a proven item in the toolkit of marketing researchers in answering various managerial questions, both tactical and strategic (Valente & Rogers 1995; Bass et al. 2001). At the same time, some questions have not been answered and some, even if addressed, still warrant further research. Saddle patterns of diffusion, when sales of innovative products first grow, then fall and stay low, and then grow again, are commonly experienced in the high-tech sector, particularly with really new (new to the world) goods (Moore 1991; Goldenberg, Libai & Muller 2002). Goldenberg et al. (2006) tested 32 new markets in the United States for the existence of a saddle and showed empirically that saddles appeared in 50% of the product categories tested. Moore (1991) was one of the first to draw attention to this phenomenon and to offer suggestions for managers to manage saddles. Moores theory was enthusiastically accepted by managers, particularly in high-tech companies. However, despite this enthusiastic acceptance the literature has paid only scant attention to it (Goldenberg et al. 2006). This paper aims to review research in diffusion of innovations in order to understand the causes behind the saddle pattern of diffusion and what managers can do to address saddles and to propose direction in further research in this area. A narrative literature review is undertaken in which models that explain the saddle pattern from selected articles are discussed along with implications for marketing strategy. The articles were selected from scholarly publications on the basis of inclusion of keywords relating to the question at hand into their abstracts. Thus only those articles that explicitly address various aspects of the research question are reviewed.

This paper is organised as follows. Section 2 contains an overview of two influential works in diffusion of innovations in application to marketing to provide the reader with the context of further review. Section 3 reviews works that aim to explain the occurrence of saddles. Section 4 relates the explanations of saddles to strategies that companies follow to manage saddles. Section 5 suggests directions for further research in this area.

2. Diffusion of innovations research

The origins of research on diffusion of innovations trace to early twentieth century works in sociology and anthropology (Rogers 1976). In the 1960s the field started attracting attention of researchers from various other disciplines: rural sociology, public health, economics, geography, political science, communication, and marketing (Valente & Rogers 1995). The theory of the diffusion of innovations in application to marketing has come a long way from its starting point in the 1960s. Here the works of two authors, Everett Rogers and Frank Bass, are reviewed in order to provide background for the discussion in the next sections.

2.1. Everett Rogerss work

Rogers (1962) made significant contribution to the field by summarising previous work and proposing several new ideas. In particular, his book provided insights into differences between adopter categories. Borrowing from an earlier work by Beal & Bohlen (1957), the book distinguishes five adopter categories based on the time of their adoption: innovators, early adopters, early majority, late majority, and laggards. It is proposed that these adopter categories differ in their needs, attitudes towards risk, and position in the social system. This postulation matches the conclusions from the influential early work on diffusion of innovations by Ryan and Gross (in Rogers 1976). This model, known as technology adoption lifecycle, has been discussed and applied in numerous instances and has become one of the key concepts in the field of diffusion of innovations (Beard & Easingwood 1996). The book also discusses the elements of diffusion settings, the innovation decision process, and the importance of peer communication, attributes that accelerate the 2

spread of innovations, and other aspects of the diffusion of innovations theory. The publication wields great influence in the field, with almost thirty thousand academic works citing the book.

2.2. Frank Basss work

Bass (1969) proposed a model of diffusion of innovations in which the probability of adopting by those who have not adopted yet is a linear function of the number of those who have previously adopted. It is expressed mathematically as: , where (1)

is the cumulative share of adopters at time in the total market capacity, is the share of new adopters at time in the total market capacity (in

discrete time),

and

are coefficients of innovation and imitation respectively,

which can be estimated from data on adoptions at the early stages of product launch or guessed using data from previous diffusions of similar innovations in similar settings. Additionally, , a constant market capacity, is defined to scale the model

onto the predicted sales volumes.

Figure 1. Bass diffusion model at

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1 2 3 4 5 6 7 8

and

.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

9 10 11 12 13 14 15 16 17 18 19 20 21 22 time (t)

Share of new adopters at time t in the total market capacity (f), left axis

Cumulative share of adopters among the total market capacity (F), right axis
Share of imitators in new adopters (qF/(p+qF)), right axis

This model posits that some people adopt independently (innovators) and others adopt under influence from others (imitators). As time passes, the share of imitators within new adopters increases (figure 1). The model has been shown to predict actual diffusions well in its basic form (Bass et al. 2001). In addition, a number of augmentations to the model have been proposed. These modifications allow to forecast the effects of marketing variables, such as advertising spend, as well as to understand the diffusion in different social settings, such as where the word of mouth effects change over time. With time, the Bass model with its modifications became a standard in diffusion of innovations research and forecasting.

3. Explanations for saddles occurrence

Here several works that offer explanations for the saddle pattern of diffusion are reviewed. Table 1 summarises the causes of saddles that each of the reviewed models propose.

Table 1. Summary of circumstances that lead to formation of saddles as explained by different models Model
Chasm theory

Authors
Moore (1991)

Circumstances that lead to formation of saddles

Different needs of early market and mainstreamers and none or minimal communication between early market and mainstreamers Differences in consumer behaviour between early market and mainstreamers and none or minimal communication between early market and mainstreamers Macroeconomic declines and relatively greater word of mouth from recent adopters None or minimal communication between early market and mainstreamers Dynamic market capacity

Cellular automata model for adoptions in two segments Information cascades model Asymmetric influence model Diffusion and market capacity coevolution model

Goldenberg, Libai & Muller (2002)

Golder & Tellis (2004) Muller & Yogev (2006); Van den Bulte & Joshi (2007) Guseo & Guidolin (2010)

3.1. The chasm theory

Moore (1991) explores reasons behind failures of technology products, particularly those that represent discontinuous innovations. He postulates that innovators and early adopters (or technology enthusiasts and visionaries in Moores terms, collectively the early market) and the rest of the market (the mainstream market) have different needs and expectations, follow different communication patterns, and often do not communicate between each other. As a result, a product that may be fast to gain traction with the early market could fail in the mainstream market because it can be unsuitable for the mainstreamers or word of mouth from the early market can fail to reach the mainstream market. Moore (1991) suggests that in order to cross the chasm between the early market and the mainstream market marketers need to modify the product (to adjust it to mainstreamers needs) and to deliberately target mainstreamers at a certain point in the products lifecycle (to compensate for the lack of word-of-mouth influence that could otherwise trigger adoption among mainstreamers). The chasm theory appears generally consistent with Rogers (1961) views on the differences between adopter categories. Moore (1991) however stresses that these differences are more pronounced between the early adopters and the early majority, while Rogers (1962) postulates that needs and behaviours of different adopter categories form a continuum.

3.2. Asymmetric influence model

In the past decade, researchers attempted to investigate how the differences in behaviour, particularly in communication, between the early market and the mainstream market, affect the pattern of innovation adoption. A new model has emerged in research, in which market is broken down into two segments (Goldenberg et al. 2006; Muller & Yogev 2006; Van Den Bulte & Joshi 2007; Joshi, Reibstein & Zhang 2009). Each of these segments is then taken to follow a modified Bass diffusion model in which the probability of adopting by those who have not adopted yet in each segment is a linear function of both the number of those who have previously adopted in this segment and the number of those who have previously adopted in the other segment. It is expressed formally as: 5

, , where

(2) (3)

is the cumulative share of adopters within segment at time in the total is the share of new adopters within segment at time is the coefficient of innovation

segment capacity,

in the total segment capacity (in discrete time), within segment ,

is the coefficient of imitation by members of segment of

adoption in segment . Additionally, , the proportion of influencers among eventual adopters, is defined. This is generalised expression of the two-segment mixture model, which is suggested by Van den Bulte & Joshi (2007, p. 405). Van den Bulte & Joshi (2007) draw attention to the fact that special cases of this generalised model have been previously explored. Further, both Muller & Yogev (2006) and Van den Bulte & Joshi (2007) themselves employ a special case of this model in which . The model therefore becomes

an asymmetric influence model, in which segment 1 (influentials) are influenced only by adoptions within their segment and segment 2 (imitators) are influenced by both adoption within their segment and adoptions by influentials. Muller & Yogev (2006) show that this model predicts actual patterns of adoption better than the original Bass model for a number of products. Joshi, Reibstein & Zhang (2009) test a special case of this model where and (a backlash against adoptions by

mainstreamers exists in the early market) and show a good fit with data on actual diffusion patterns. Van den Bulte & Joshi (2007, p. 406) show that their model can predict a saddle in diffusion in certain conditions: when the imitator segment is not greatly receptive to the adoptions in the influencers segment ( is low) and when the diffusion in

the imitator segment is slower than among influencers (figure 2). Van den Bulte & Joshi (2007, p. 416) therefore conclude that their model explains the saddle pattern of diffusion. However, the influence that the influencers exert over the imitator segment ( has to be low for the asymmetric influence model to predict the saddle pattern (Van 6 )

Figure 2. Asymmetric influence model of diffusion at , , and .

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 time (t)
Share of influencers who have newly adopted at time t in the total market capacity (f1) Share of those in the imitator segment who have newly adopted at time t in the total market capacity ((1-)f2) Share of new adopters in both segments at time t in the total market capacity (f1+(1-)f2)

Figure 3. Asymmetric influence model of diffusion at , , , and .

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 time (t)
Share of members of segment 1 who have newly adopted at time t in the total market capacity (f1) Share of members of segment 2 who have newly adopted at time t in the total market capacity ((1-)f2)

Share of new adopters in both segments at time t in the total market capacity (f1+(1-)f2)

den Bulte & Joshi 2007, p. 406). In fact, a similar pattern of diffusion can be predicted by the general two-segment mixture model in which there is no interaction between segments: and (figure 3). This leads one to conclude that the saddle in

the asymmetric influence model is explained by a lack of interaction between influencers and the imitator segment and relative slowness of diffusion among the imitator segment, which corroborates Moores (1991) contentions on the causes of saddles. Van den Bulte & Joshi (2007, p. 416) contrast their model with the chasm theory by suggesting that their model shows that marketers do not necessarily need to change their product in order for it to gain traction with the mainstream market. However, the innovations they test their model on (for example, medical equipment and drugs over decades long periods) in fact underwent incremental redevelopment, thus by the time the product was taken up by mainstreamers it could have already been modified to meet mainstreamers needs. Thus, it appears that the study by Van den Bulte & Joshi (2007) is not conclusive in refuting Moores contention on the need to redevelop the product for mainstreamers.

3.4. Cellular automata model for adoptions in two segments

Goldenberg, Libai & Muller (2002) develop a cellular automata model for adoptions in two segments in order to explore diffusion in two segments and particularly the saddle pattern. Each segment in their model consists of cells (consumers) that take the value of either 0 (not adopted) or 1 (adopted). In each period, for every cell with value of 0, a probabilistic experiment is run and the value of 1 is assigned with the following probability: , , where (4) (5)

is the probability of adoption at time by a consumer in segment who is the probability that a consumer in segment will adopt is the probability that a

has not adopted yet,

independently (similar to coefficient of innovation),

consumer in segment will adopt as a result of interaction with an adopter in

segment (similar to coefficient of imitation), adopters within segment at time .

is the cumulative number of

Goldenberg, Libai & Muller (2002) further explore the situation in which segment 1 exerts influence over segment 2 ( ), but not the other way round ( ),

similarly to influencers and the imitator segment in the asymmetric influence model. Further, they look into cases where diffusion in segment 1 (the early market) is faster than in segment 2 (the mainstream market). They then assess their model against actual diffusion patterns of electronics-based durable goods and find that the model fits well with the data. They are further interested under which circumstances a saddle pattern emerges under asymmetric influence. They run a series of stochastic experiments with varying values of , , , , and in each series and study the prevalence of

the saddle pattern in each series of experiments. Goldenberg, Libai & Muller (2002, p. 8) find that the value of (the influence of the segment 1 over adoptions in

segment 2) plays an important role in determining the saddle, and lower values of tend to correlate with the existence of saddles. The model in Goldenberg, Libai & Muller (2002) further corroborates Van den Bulte & Joshi (2007) and Moore (1991) in that the dual market structure can lead to saddles.

3.5. Diffusion and market capacity coevolution model

Guseo & Guidolin (2010) recognize that most previous attempts to explain saddles were based on the proposition of a dual structure of the market. They attempt to show that saddles can occur even if there is no gap in communication between the early market and mainstreamers. In their preceding work, Guseo & Guidolin (2009) develop a model in which diffusion and market potential coevolve. They argue that for various reasons market capacity should not be expected to remain constant over the lifetime of the product. For example, word of mouth about the product should not only influence non-adopters to adopt, but also deepen the market capacity by informing those outside the market about the product and thereby forming a need in them. They use statistical methods of estimating average behaviour in cellular automata systems to propose the following model of diffusion:

, where is the cumulative number of adopters at time ,

(6)

is the number

of adopters at time (in discrete time), , ,

is the dynamic market potential at time

is an intervention tool (to incorporate environmental impacts, relates to the decay effect from

such as macroeconomic slowdowns or booms),

unsustained adoptions (adopters who later unadopt and thereby do not participate in diffusion), model). One can notice that when , (no environmental interference), and are coefficients of innovation and imitation (similar to the Bass

(nobody unadopts), formula (6) takes the form of formula (1), where and Guseo & Guidolin (2009). Guseo & Guidolin (2010) test their model on diffusions of two drugs that were introduced in 2005 in Italy and experienced a saddle in their diffusion. Over the period of diffusion of both drugs, new applications for them were identified, which altered the market capacity. Guseo & Guidolin (2010) find their model fits well with the moving average of weekly sales of the drugs (it does not predict the frequent fluctuations in sales, which can be due to organisational factors). Guseo & Guidolin (2010) conclude that the interplay between the dynamic market capacity and diffusion can lead to the formation of saddles. A notable limitation of this study is that testing the model only on two innovations (both of one type and in similar settings) does not provide sufficient evidence for more general application of this model. Unlike the dual structure models, the model in Guseo & Guidolin (2010) does not provide scope for abrupt changes in needs or behaviours between the early market and mainstreamers and therefore articulates that in circumstances where the model is applicable the chasm may be crossed without product redevelopment. , thus the Bass model is a special case of the model in

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3.6. Information cascades model

Golder & Tellis (2004) develop a theory in which the speed of diffusion at any point of time is affected not only by the cumulative number of adopters (expressed through others ( in the Bass model), but also by information on recent adoptions by in discrete time, where is the current period and is the number

of recent periods). They propose that adopters talk about their adoptions more for some time after adoption. As time goes by, they exert less word-of-mouth influence over those who have not adopted. Thus the number of recent adopters matters. Golder & Tellis (2004) further incorporate the gross national product, a macroeconomic variable, into their model. Their model shows good fit with historic data on diffusions of really new (new to the world) innovative products in the United States and the gross national product. Golder & Tellis (2004) conclude that a macroeconomic decline may start a negative information cascade: the decreased speed of diffusion in the period of the external shock may negatively affect the speed of diffusion in later, more prosperous periods. While the focus of Golder & Tellis (2004) is on the speed of the initial takeoff and the eventual slowdown in the diffusion of new technologically innovative products, their work is relevant to the saddle phenomena. Peres, Muller & Mahajan (2010, p. 95) identify that the model developed in Golder & Tellis (2004) can explain the saddle pattern of diffusion. Thus the information cascades model explains saddles through the influence of external factors and the relative importance of recent adopters in the spread of innovations. Similarly to Guseo & Guidolin (2010), the model in Golder & Tellis (2004) model shows that the chasm may be crossed without product redevelopment, if the model is applicable.

3.6. Other explanations of saddle patterns

Goldenberg et al. (2006) conduct interviews with managers in the Israeli high-tech sector to investigate the prevalence, explanations and firms responses to the saddle pattern. They identify that the dual structure of the market (the early and mainstream markets) is often not the only reason for saddles: firms difficulties in adjusting itself to large-scale manufacturing activities, competition from substitute 11

goods, competitors demarketing activities aimed to jeopardise sales by the company in order to give these competitors time to develop a similar product, new technological standards, and negative word of mouth are all seen as possible causes of saddles. Goldenberg et al. (2006) also detect a special case of the dual structure: the early market consists of established customers (usually research labs) who try all new products from the company, often regardless of these customers needs.

4. Strategies that address saddles

Goldenberg et al. (2006) identify four basic strategies that companies follow to manage the saddles: selling out to larger firms (a preferred strategy among startups), hibernating, flitting, and keeping moving.

4.1. Hibernating strategy

The hibernating strategy involves temporary downsizing and waiting for the new wave of adoptions. The strategy can be successful only if the new wave arrives. As shown earlier, different models explain saddles differently. If the saddle is a consequence of the dual structure of the market, then the new wave of adoptions should come from mainstreamers. According to Moore (1991), the needs of the early market and mainstreamers are heterogeneous and the product will need redevelopment, which requires investment (Goldenberg et al. 2006). Thus if one is accept Moores (1991) contentions, the hibernating strategy should fail as downsizing is directly opposite to investment in product redevelopment. However, if the saddle is caused by information cascades, the coevolution of diffusion and market capacity, or factors identified by Goldenberg et al. (2006), this strategy appears sensible: companies simply need to wait for these factors to readjust and the saddle will eventually end.

4.2. Flitting strategy

The flitting strategy involves abandoning one target market altogether and moving into a different market. For example, a maker of new industrial equipment may move away from selling to pharmaceutical companies to targeting marine equipment manufacturers. This strategy can be rationalised when the company cannot wait for 12

the saddle period to end (high required rate of return, long expected saddle period) or when managers perceive that the beginning of the saddle may turn out to be the final decline in sales (Goldenberg et al. 2006).

4.3. Keeping moving strategy

The keeping moving strategy involves deliberate targeting the mainstream market and redeveloping the product, as suggested by Moore (1991). Mahajan & Muller (1998) warn that any decrease in the sales before the expected late stages of product lifecycle, including saddles, should be reacted to with rethinking the product and marketing activities, particularly by ensuring that the product appeals to the mainstream market. Easingwood & Harrington (2002) suggest that given the high prevalence of saddle patterns of diffusion high-tech companies should anticipate the saddle and use its time to relaunch the product. Thus Mahajan & Muller (1998) and Easingwood & Harrington (2002) agree the relaunch should be an integral, planned or reactive, part of new product development. Research by Muller and Yogev (2006) helps managers anticipate saddles and plan relaunches. They use asymmetric influence model in which the mainstream market strictly imitates ( ) to find the time when adopters from the mainstream market

start to dominate the adopters (change-of-dominance time). Muller and Yogev (2006) find parameters of diffusion for a number of really new (new to the world) products and then use regression analysis to find out how these parameters affect the changeof-dominance time. They find that if a saddle exists, change of dominance happens during the saddle time and on average change of dominance occurs when 16% of the market capacity adopt the product. Thus managers can anticipate change of dominance and a possible saddle in diffusion as the product reaches 16% of the planned market capacity and plan relaunches for that time.

5. Directions for further research

The reviewed research leaves some questions open. In particular, Moores (1991) suggestion that the early markets needs are dissimilar to those of the mainstreamers should be investigated further. Also, the literature has so far escaped addressing competition and negative word of mouth specifically. 13

5.1. Testing Moores contention on dissimilarity of needs

The theory, particularly dual structure models, developed in the last decade does not address differences in needs of the two segments and therefore neither refute nor prove Moores (1991) suggestion that the early markets needs are dissimilar to those of mainstreamers. Further, no specific attempt appears to have been made to see if redevelopment of product mitigates the saddle or leads to greater adoption rates. Knowing if the needs and behaviours between the early adopters and the early majority differ significantly more than between other adopter categories, particularly when dual market structure is manifest, and if product redevelopment is necessary to bridge saddles will allow assessing the viability of the hibernating strategy. It is therefore suggested to test if needs (which could be studied through preferences) of those who adopt before and after the saddle in past diffusions differed between each other more than within each of these groups of adopters. A separate study into the effects of product redevelopment on diffusion can be undertaken.

5.2. Competition and saddles

The interrelation of competition and diffusion of innovations has been widely researched (Gatignon & Robertson 1989; Peres, Muller & Mahajan 2010), however it appears that no study has investigated how competition affects saddles or vice versa. Goldenberg et al. (2006) show at least one way that competitors can cause saddles by demarketing the innovation. Further research may provide useful insights for managers in non-monopolistic industries about what strategies should be employed if their products experience saddles.

5.3. Negative word of mouth

Goldenberg et al. (2006) show that managers believe that negative word of mouth about the product may lead to a saddle. Effects of negative word of mouth on diffusion have been researched previously. Further study may be done to examine if established models in this field, such as the model in Mahajan, Muller & Kerin (1984), can explain the occurrence of saddle patterns and what managers can do to prevent negative word of mouth from creating saddles.

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6. Conclusions
Several explanations for the saddle pattern of diffusion have been proposed in the literature. Three of them attribute the causes of saddles to a dual market structure, others to coevolution of diffusion and market capacity, information cascades, and external factors. It has been shown that companies have four strategic options to manage saddles. Issues relating to the hibernating strategy are of particular interest for further research. The viability of hibernating depends on whether the mainstream markets needs are similar to those of the early market. Moore (1991) contends that these needs are different, thus if his theory is to be followed, this strategy should fail. However the literature has avoided testing this contention. Therefore further research into the needs of the early market and mainstreamers should elucidate if hibernating is a viable strategy. It is further proposed that research be undertaken on the interrelation of competition and saddles and on the effects of negative word of mouth on formation of saddles as these two areas present practical interest and appear not to have been addressed in the literature.

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