Sources For Product Ideas: a Proactive View on the Consumer

Gerd Fleischmann, University of Frankfurt
ABSTRACT - Normally consumers are not sources for product ideas both because for the individual consumer exit is cheaper than voice, and because producers for mass markets prefer process innovations to product innovations. But in affluent societies households are no longer constrained to be general producer units: they get the chance to specialize and to become expert partners to smaller firms which in order to survive show more interest in product innovation.
[ to cite ]:
Gerd Fleischmann (1981) ,"Sources For Product Ideas: a Proactive View on the Consumer", in NA - Advances in Consumer Research Volume 08, eds. Kent B. Monroe, Ann Abor, MI : Association for Consumer Research, Pages: 386-390.

Advances in Consumer Research Volume 8, 1981      Pages 386-390

SOURCES FOR PRODUCT IDEAS: A PROACTIVE VIEW ON THE CONSUMER

Gerd Fleischmann, University of Frankfurt

[Professor of economics, co-ordinator of consumer research projects for the German Federal Department of Research and Technology. Address: Schumannstresse 60, D 6000 Frankfurt/M. I thank Professor Joseph Agassi for his kind advice.]

ABSTRACT -

Normally consumers are not sources for product ideas both because for the individual consumer exit is cheaper than voice, and because producers for mass markets prefer process innovations to product innovations. But in affluent societies households are no longer constrained to be general producer units: they get the chance to specialize and to become expert partners to smaller firms which in order to survive show more interest in product innovation.

WHY CONSUMERS ARE NORMALLY NOT SOURCES FOR PRODUCT IDEAS

Consumers usually feel powerless vis-a-vis firms. They believe all they can do with consumer goods, offered by a given firm, is take it or leave it. The firm too, be it a producer or a retailer, also feels pressured by the market. It Believes that consumers easily switch to another supplier. Households and firms are anonymous to each other. Consumers do not suggest product changes or new products to firms, and firms do not ask households for new product ideas. This is not out of any ill feelings on either side, but, under certain conditions, the rational way to behave.

Consumers Prefer Exit to Voice: Exit Is Cheaper

If a consumer is dissatisfied with a consumer good, produced by one of several competing firms, he can choose either to induce the producer to change the good according to his preferences--this option is called "voice" by Hirschman (1970)--or to look for another supplier, i.e. to choose what Hirschman calls the exit-option.

In general the cost of exit is low. The consumer just has to find out, which are the other suppliers, to get from neighbors, retailers, consumer unions, or state agencies, some information about the qualities of the competitors' goods, and to buy next time one of these goods. Of course, there is the risk that experience with some other product is also disappointing. But even then, the difference between the expected and the experienced quality will hardly be larger, because the quality distribution of mass produced consumer goods is generally very narrow.

By contrast, the cost of effective voice is very high for the individual consumer. Admittedly, it is not expensive to write a letter to the producer. But chances are very poor that the complaints of a single consumer will induce the firm to change the good or to produce a new good. For, why should a firm with mass-produced goods follow the advice of an individual consumer? It is rational to do so only if there are indicators favoring the conjecture that the advice comes from a representative consumer. But it has to be suspected in the first place that consumers writing informed letters on how to change the quality of a product are not representative for the average consumer of mass products. One effective way to convince the firm that it will pay to change the product is to induce a large number of other consumers to advise the firm concerning the same kind of change. But this is a very expensive endeavor, and even if a consumer tries it and succeeds, it is still uncertain, whether a firm will make the recommended change.

Seen from the point of view of the economic theory of collective action (Olson 1965), the choice of the voice option by an individual consumer is a contribution to a public good, in this case a contribution to the common goal of consumers with similar preferences regarding the kind of goods the individual consumes is complaining about. Generally, in large groups an individual has no incentives to make such contributions. A "political entrepreneur" is needed who organizes the group by preparing selective incentives for group membership, for instance in form of private goods, which are available for members only, so that free-riders can be excluded.

To sum up, if the consumer of a certain mass-product is dissatisfied with it, he will normally prefer the exit option, because it is cheaper than the voice option, if voice is to be effective. But in the case that consumers with similar tastes get organized by a political entrepreneur, the voice option may become cheaper.

Producers of Consumer Goods Prefer Process Innovations to Product Innovations: Process Innovations Are Less Risky

My starting point is the general economic hypothesis that a firm facing alternatives with the same profit per dollar capital invested will choose the least risky. Now it is easy to see that for mass producers of consumer goods it is generally less risky to invest into a new production process than into a new product. The main reason for this is that the suppliers of investment goods, which are needed for the process innovation, have to supply their own investors with calculations and details of the know-how concerning the new process: in order to sell an investment good, one has to show that the good to be used will reduce production costs. There is no comparable activity on the side of the new consumer product. Even in cases in which the firm incurs the cost of getting informed about consumers' preferences of goods and of changes of goods, the probability that a new consumer good will be a success is relatively low.

The risk of innovation is controllable to some extent. One important way to reduce the risk is to have more communication with the main partners in the innovation process, namely the suppliers of new investment goods and the customers of now consumer goods. But here again it is more efficient for a firm with mass production of consumers goods to intensify the communication with firms supplying investment goods than with households buying the consumer goods; this is so mainly because in the case of communication between firms there are experts on both sides, but also because of the existing network of communication. Experts can easily agree, then, upon what is needed and what can be done about it, whereas households have in general no expertise on mass produced consumer goods and no easy access to the industry.

An additional reason for mass producers of consumer goods to concentrate on process innovation rather than on product innovation is that the loss of customers due to exit towards a producer of a new consumer good is usually a relatively slow process. Consumer habits usually do not change very quickly. But if a competitor succeeds in cutting down markedly production costs and thus prices, then there is the danger of a sudden loss of buyers. To put it differently, households are more accustomed to a kind of consumer good, for instance, to an automobile, a refrigerator or a washer, than to a special brand of that good.

In sum, mass producers of consumer goods generally prefer process innovations to product innovations because process innovations are easier to compute, because there is a better communication between firms than between firms and households, and because a successful process innovation by a competitor threatens the survival of the firm.

CONSEQUENCES OF THE DOMINANCE OF THE COMBINATION OF EXIT AND PROCESS INNOVATION: MORE GOODS AND MORE FREE TIME FOR EVERYBODY

The dominance of exit and of process innovations has resulted, on the positive side, in the rapid growth of productivity of labor and in rapid economic growth in general. On the negative side, the fine tuning of the qualities of consumer goods with the tastes of the consumers has been somewhat neglected. From an elitist standpoint this development may be deplored. Compared to the high standards of craftsmanship of former generations, many mass products of the present are of comparatively lower quality. But there are lots of consumer goods which even the most ardent admirers of pre-industrial craftsmanship would not miss: if not railroads, automobiles, airplanes, refrigerators, then cameras for reproductions of art work, hi-fi records, etc.

Seen from an egalitarian standpoint, the consequences of the combination of exit and process innovation seem more positive. The emphasis on process innovation resulted in transforming the luxuries of the rich of yesterday into mass consumption of the man in the street today. The most impressive example in the history of this development may be Ford's famous model T. It has not been a marked progress in automobile quality or style, but a very marked progress in automobile production. It was the breakthrough to the automobile using society. Even though it is easy to see today the negative consequences of auto-mobilization--smog, noise, cancerous growth of suburbia, etc.--the automobile has doubtless also enhanced the freedom of action of the average household very effectively.

The emphasis on process innovations resulted not only in rapid economic growth; a part of the gain in productivity has been transformed into the acquisition of more free time for all members of the household: their role as income earners has been better accomplished by a shortening of their work day, and their roles as producers in the household was made much lighter by household investment goods which raise the productivity of household work; these are electric washers and irons, wash-and-wear clothing, vacuum cleaners, deep freezers, etc. As will be shown later on in more detail, it is just this gain in free time which hopefully will alter the relationship between firms and households, at least between some kinds of firms and households, from exit toward more voice.

INCENTIVES AND CAPACITIES FOR THE DEVELOPMENT OF PRODUCT IDEAS IN HOUSEHOLDS OF AFFLUENT SOCIETIES

Abundant free time in the household allows members to specialize within the household. This leads to a growing demand for specialized consumer goods coupled with the required higher ability of the consumer to communicate with firms.

Households as Producers

Households are not only institutions offering the services of their work-force in the labour market and demanding products and services in consumer goods markets; they are also institutions in which market goods are transformed into final goods and services to satisfy its own members. Except for goods purchased for their function as status symbols, goods bought in the market serve as inputs into the household's own production process, where the other inputs are the (household work-) time and the human capital of its members. The output is the satisfaction of a variety of demands. Because there are many of those which have to be satisfied almost simultaneously, the household performs diverse production processes in parallel. The household can thus be characterized as a generalized producer. As long as the household has only enough income and free time to perform a multitude of the more urgent tasks, the members have little chance to develop expertise in one or a fey of the household's production processes.

The scene alters as soon as the household has a growing income and free time, which enables individual members to specialize on one or few production processes.

The most important features of this specialization are the cumulative effects in knowledge and motivation. The specialized household has the chance to accumulate knowledge or--as economists say--human capital in a way similar to that of the specialized firm. In contrast to physical capital human capital has the nice property that use does not diminish it; on the contrary, use, above all intelligent and intensive use, gives the chance of growth of knowledge, through criticism, innovation, and adaptation. In this way members of the household may become experts in cooking, hiking, fly fishing, photography, even painting, etc.--with the result of ever-increasing standards of quality of the household production.

The cumulative effect of specialization is reinforced by a cumulative motivation effect. In humanistic psychology three kinds of needs are distinguished: existence needs (i.e. need for food, shelter, et:.), social needs (i.e. needs for communication and cooperation with other people) and growth needs (i.e. needs for personal development or ego growth). Whereas the satisfaction of existence needs intensifies social needs and the satisfaction of social needs, intensifies growth needs, the satisfaction of growth needs further strengthens growth needs (c.f. Alderfer 1972). Thus it is to be expected that households with little income will concentrate mainly on existence needs--whereas those with income and free time at their disposal, will in the first place try to satisfy more growth needs. Specialization in households in the process of production intended to satisfy growth needs will therefore stabilize these processes. The cumulative process of the development of human capital or the growth of knowledge and the motivational cumulative process of growth needs, are thus mutually supporting.

Growing Demand for Expert Consumer Goods as Consequence of Growth of Human Capital in Household Production

An important consequence of the accumulation of human capital is that the productivity of the specialized production process in the household grows. Therefore the shadow prices of the input-goods for this production process will fall relative to the process of the other input-goods of the household production processes. Ceteris paribus, as prices fall the household will buy more of these input-goods (c.f. Backer and Michael 1973). For instance, when a consumer becomes expert on baroque music, records with this music are relatively cheap considering the time invested to become an expert and the time necessary to hear the records repeatedly. The growth of knowledge in the realm of specialized household production reduces the significance of the market price of the relevant input-goods, though their quality will become more important; this is so because these goods have to fit the higher quality of human capital.

Higher Communication Ability and Interest as Consequence of Growth of Human Capital in Household Production

By specialization in a line of household production the consumer also will be an expert on those input-goods which he buys from firms. And because the quality of these goods is increasingly important to such a consumer, he is not only able, but also has increasingly greater interest in communicating with the supplying firm.

As distinguished from his interests in his role as generalized household producer, the preference of the specialized consumer is of voice over exit. The specialized consumer has as consequence of his expertise and of the minor importance of market prices generally input-goods of the highest attainable quality or input-goods which he finds best suited for his specialized production. Therefore exit is of little use for him: he has already left most of the market. All he can do in order to improve the input-goods is to convince the supplying firm to upgrade its product, or to improve his own specialization. Yet there is an important question here: is not the specialized consumer better off when he behaves as a free-rider, hoping that other consumers with the same specialization communicate with the firms in order to change the quality of the input-goods? Does the economic theory of collective action also apply here, because consumers specialized in certain kinds of household production form large (latent) interest groups? Obviously, many specialized household producers will choose the free-rider position. But there are also many consumers who want to communicate because this process is self-rewarding in the sense that exchange of information between experts has always the chance of promoting the knowledge of both sides.

INCENTIVES FOR FIRMS TO ADOPT PRODUCT IDEAS FROM HOUSEHOLDS

Communication requires at least two partners. It is not enough that specialized consumers are interested in it; also the supplying firm has to be ready for communication. It is therefore advisable to look for the consequences of household specialization for the firm, in order to find incentives for it to communicate.

Specialized Small Firms as Complements to Specialized Households

One result of household specialization is the mushrooming of new small markets for expert consumer goods in addition to the large markets of mass-produced consumer goods for the generalized part of household production. Small markets imply small series of production and therefore higher costs and higher prices. But as has been demonstrated, for expert consumers quality is more important than price. Therefore small enterprises producing expert consumer goods may be viable, whether as independent economic firms or as small activity units within larger corporations.

Small Production Series Favorable for Product Innovation

Just as large scale production is accompanied by a tendency to stress production innovations, so small scale production induces entrepreneurs to use product innovation as main instrument of competition. This does not mean product innovation just for the sake of novelty. For an expert consumer the new is not always the better. More important for him are high standards of product quality and fit for the specialized household production process. The better the fit between qualities of the product and the requirements of the production process in the household, the better and the clearer will be the market position of the firm.

The hypothesis that mass production favors process innovation and small scale production favors product innovation could be challenged by the wave of revolutionary product innovations. The latest was caused by microelectronics in mass-produced consumer goods. Obviously, quartz watches, pocket computers, electronic programming of household appliances etc., are all instances of a large set of important product innovations of mass produced consumer goods. But all product innovations of the last century will do as examples. This is why the hypothesis says mass-production favors, not entirely insists on process innovations. The rapid diffusion of product innovations can only be explained by the fact that it resulted in even more revolutionary process innovations. Therefore if process innovation is understood in a generalized sense, the hypothesis can be stated strongly: Mass production insists on process innovation. Thus, about ten parts of an electronic watch, for instance, are cheaper to produce and to assemble than the about hundred parts of a mechanical one, Similarly, the contribution of microelectronics to large productivity gain can best be recognized by the change of the production location of pocket computers. Invented in the USA it has been first produced there. Lower wages in Japan and in other Asian countries attracted production to these countries. But with the invention of microelectronics, that is to say of the chips, the United States regained international competitiveness.

The importance of product innovation and quality adaptation to the demands of expert consumers are incentives for entrepreneurs to be responsive to suggestions of consumers. Whereas a complaining consumer in the case of mass products may be viewed as unrepresentative, in the case of specialized consumer goods the hints of a consumer are taken seriously, since his suggestions are from the start backed by the expertise that prompts them; and they depend to a much lesser degree on emotions than those of the mass-product consumer's complaint. This way newer and even higher standards of both production and consumption emerge.

Smaller Hierarchy Distances in Small Firms Facilitate Communication with Households

Not only the incentive to communicate with consumers is higher in small specialized enterprises than in large, mass producing firms, there are also higher chances that suggestions made by consumers will not be buried in the files of a large bureaucracy. In small enterprises it is easier to have a shortcut between gatekeepers in the organization, who communicate with the outside, and those persons, who initiate and support the processes of innovation. This is not to say that large firms necessarily are less innovative. They may decentralize and build small subsidiary enterprises which have in principle the same possibilities as independent small firms.

THE NEW COMBINATION OF VOICE AND PRODUCT INNOVATION

I shall now present a brief historical case study to show how communication between households and firms in the process of product innovation may work and close with a word about consequences for the future. But first let me sum up.

Voice and Product Innovation as Consequences of Specialized Household Production

Household's disposable income and free time grows; money and time are no longer used for necessities of life only; an increasing part of the household's budget is spent on activities that satisfy personality growth needs; an important change occurs in household production. The generalized part of household production is complemented by a specialized one, characterizable by a cumulative process of human capital growth and of motivation for further growth. Consumers become experts interested and capable of influencing the process of product innovation in firms. In their role of specialized household producer, they prefer voice to exit. Consequent to specialized households small specialized enterprises evolve, at times viable in spite of small scale-high cost production processes, because the specialized households, for whom they cater prefer high quality to low price. Instruments of competition are therefore in the first place product innovations. This corresponds to the interest of the expert consumer to influence the quality of the goods, made by the firms. This way the firms become susceptible for new product ideas from consumers. A paradigmatic case is the following.

A Paradigmatic Historical Case Study: The Amateur Photographer Heinrich Kuehn, the Optical Engineer Franz Staeble, and their softlens "Imagon"

Heinrich Kuehn (1866-1944), who lived in Austria most of his life, was a famous photographer (c.f. Scholz 1980).  He was an amateur photographer both because he was a person of independent means, and he objected to the professionalization of this new art. His artistic ideal was photography imitating painting. He wanted to be an artist who produces paintings not with brush and paint, but with camera and film. One of the techniques he invented is to superimpose images on one frame of film, one hard and one soft. This was effected by the use of the center of a lens, which sets a sharp image; the soft image was effected by the use of the periphery of a lens. The superimposition of a soft image on the sharp one had the result of a clear image with slight diffusion and sparkling light spots, so as to resemble a painting. This technique was very difficult and time-consuming and only fitted for immobile objects. Kuehn wanted to have a lens which at once produced the wanted result of the two images. He had the ingenious simple idea to put in front of the lens a diaphragm which has a perforated periphery. The normal small iris opening now yields the sharp core image and the marginal rays, which are reduced by the variable perforation of the periphery, form the the soft, but at once superimposed image.

In Franz Staeble Kuehn found an owner of a small optical firm who was ready to design and produce the lens he wanted. For years they communicated and cooperated. Staeble produced many models and Kuehn tested them till he had the model which met his demands. The lens first appeared on the market in the year 1928. Ambitious photographers still seek the "imagon", produced today nearly unchanged and never outperformed by any other softlens producer.

This case exhibits all the elements required for the household to become a source for new product ideas.

- a consumer with sufficient disposable income and free time to enable him to work in a specialized household production;

- the consumer accumulates human capital and satisfies his own growth needs;

- a small enterprise, primarily interested in product innovation, and with the entrepreneur at the same time gatekeeper and promoter of innovations;

- a small, but not too small market with expert consumers, who appreciate the quality of a consumer good for specialized household production.

CONCLUSION: CONSEQUENCES FOR THE FUTURE-THE HOUSEHOLD AS GROWTH SECTOR

The problem of consumers as sources for product ideas may be of limited interest. But the analysis of this problem leads directly to a proposition which is of general interest, namely the thesis that in comparison with the household, markets and firms will lose their importance as sources of welfare. It is thus not necessary to combat the mass-market but to use it in order to supersede it.

Economic and Social Limits to Growth

Many world crises -nutrition, energy, raw materials- indicates the end of unmitigated economic growth. Perhaps technological progress will shift these limits outward. But there are also social limits to growth (c.f. Hirsch 1976). Perhaps one day every household may have its refrigerator, washer, car, etc. But it is impossible for everybody to have the proverbial lonely vacation house or to be a highly paid executive. The very success of economic growth in the past obscured for a while the social limits to growth. But when economic growth ends or slows down, the social limits will be increasingly felt. This will inevitably sharpen social conflicts. To contain these social conflicts, Hirsch proposes more equal income distribution. This may be one possible response to this challenge. But there are others.

No Limits to Growth in Specialized Household Production

Production in the general sector of the household seems to be one of the economic sectors with the largest growth of welfare today (c.f. Burns 1975 and Gershuny 1978). This growth depends largely on material investment goods, bought in the market, and therefore indirectly on economic growth. But growth in the specialized sector or household production depends more on the availability of free time which the consumer may devote to these activities, and on accumulated human capital; material goods bought in the market are of decreasing importance. Therefore the growth of welfare in this sector is not subject to the same material limits of growth. And growth in the specialized sector of the household is also independent of social limits to growth. For, to be a photographer or a fisherman who amply satisfies his growth needs, one need not have an expensive camera outfit or a motor yacht. Expensive material investment goods only compensate for lack of time and for lack of human capital. This therefore may satisfy the social needs of a busy executive-it may gain him social status by conspicuous consumption-but it will not satisfy his growth needs (in the sense of ego growth or personality growth). It may be one of the most important tasks of socioeconomic theory and of welfare policy to explore and to strengthen the unlimited growth possibilities of specialized household production that go with the growth of human capital.

REFERENCES

Alderfer, Clayton P. (1972), Existence, Relatedness, and Growth, New York and London.

Becker, Gary S., and Michael, R. T. (1973), "On the New Theory of Consumer Behavior", in Swedish Journal of Economics, 75, 378 ff.

Burns, Scott (1975), Home, Inc. The Hidden Wealth and Power of the American Household, Garden City, New York: Doubleday & Co.

Gershuny, Janathan (1978), After Industrial Society-The Emerging Self-Service Economy, London and Basingstoke: The MacMillan Press Ltd.

Hirsch, Fred (1976), Social Limits to Growth, Cambridge, Mass.: Harvard University Press.

Hirschman, Albert O. (1970), Exit, Voice and Loyalty, Cambridge, Mass.: Harvard University Press.

Olson, Manucur, Jr. (1965), The Logic of Collective Action Public Goods and the Theory of Groups, Cambridge, Mass.: Harvard University Press.

Scholz, Alfons (1980), Lichtbilder mit dem Imagon, Herrsching/Ammersee: vwi Verlag Gerhard Knuelle.

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