How to Position your Innovation in the Marketplace — Limitations of the Encroachment Framework

There are hundreds of innovative products that entrepreneurs create and take to market, but only very few succeed. Many reasons can lead to a launch failure, but assuming that the product is functional and there is an existing need for the proposed idea, then it is likely that the lack of market penetration is a result of non-ideal positioning of the product/service.

I will limit the discussion to new products and leave out iterations of an old existing product. Let’s start by discussing the six encroachment types as determined by new product performance on core and ancillary attributes. Figure 1 above shows that for every new product, the core attributes can be higher, lower, or the same as the existing products. Moreover, the new (bundle of) attributes’ performance may be weak, moderate or strong. Depending on the product’s location on the matrix, it will have a different market segment. For example, a product with higher core attribute performance and strong new attribute performance will be positioned in a new market high end segment, where the entrepreneurs can charge higher prices for lower quantities delivered.

Eventually, the quantity produced will increase and prices will drop to a certain point at which the product will start encroaching on other markets (such as the new attribute high end market). It is at this point that the product starts competing with older existing products, and have different encroachment patterns. There are four major encroachment patterns discussed in “High-end Encroachment Patterns of New Products” by Rhee et al., and these are Traditional, rapid diffusion, Prolonged Niche, and Fad. A traditional encroachment pattern is one that after launching a new product, it expands to compete with high-end existing products, and continues expanding by diffusing into down-markets (lower end markets). A rapid diffusion pattern has the same dynamics as the traditional pattern, but it expands into the other markets at a much faster rate (iPhone leaps to mind for this pattern). A prolonged niche pattern is a product that can sustain itself for a prolonged period of time in its own niche market (such as Lamborghini and Ferrari). Finally, a Fad is a pattern where the product is launched to the market and can achieve high volume of sales. But, the sales die out quickly and the product loses its popularity and may be forced to exist the market (GoPro can be an example).

The framework was designed as a tool to assist entrepreneurs in identifying the market type and the encroachment pattern that their product will display. However, this framework, while helpful in evaluating the past, does not offer a guideline to predict the future behaviour of the market. For instance, what would a company do if it incorrectly positions its products? How does a company decide if it is in their best interest to use a certain encroachment pattern (a prolonged niche for instance) over another? These are all questions that challenge the effectiveness of the framework. Another limitation of the framework is that it ignores the psychological aspects of the consumers, as well as the entrepreneur. let’s consider a scenario where a new product enters the market as a high-end new product and aim to create a brand. As a result, the company introduces the product at a high price and maintain the price levels. However, after a certain time period, the company realizes that they are not generating as much revenue as they anticipated, and lowering the prices would more likely solve the issue. But if the company wants to maintain a high-end exclusive product, then lowering the prices may stain their branding efforts, and sustaining themselves in a prolonged niche will be more favorable regardless of the framework suggesting the traditional model as an ideal encroachment pattern.

Now consider the Tesla scenario. Tesla’s objective was to create a fully electric car that does not use oil as fuel. One can argue that the core attributes of a Tesla car are unchanged (a car’s core attribute is to travel from point A to B), but the ancillary attributes fall into the strong ancillary attributes region of Figure 1 above. Although the company’s objectives were based on environmental issues, the customer may buy a Tesla for a completely unrelated reason. Thinking about electric cars (such as the smart car) in general, their performance is always superior to those that operate on oil due to higher torques generated by electric motors and signal speed that is much faster than the mechanical ones in a diesel engine. Yet more people would by a Tesla than any other electric car. One can then conclude that the price range of a Tesla car may have put it in a prolonged niche market, where it would be considered a luxury car. In fact, it may also encroach on other sports cars in the same price range because of its exterior shape.

Another limitation of the framework is that it does not take into account regulations that exist on different market structures. For instance, if an entrepreneur enters a market with a product that does not have any older substitutes, then the product may exhibit a monopoly (or monopolistic) market structure. If the product/service becomes a necessity, the company may decide to raise the prices to drive revenue up. However, government regulations may impose a price cap on the product that may substantially reduce the company’s revenue, or even operate on a loss and use government subsidies to stay in business (in extreme cases).

The Encroachment model is incomplete, and coming up with a comprehensive framework is unrealistic. However, one can use the framework to learn the different market dynamics and operations, which can provide a basic knowledge and insight to change the positioning strategy if other patterns do not work.