The Law of Market Failure

This is the first in a series of articles on how to make sure that you are building The Right It before you build It right.

I am going to begin by tackling the rather difficult and unpleasant subject of market failure. It may not be the gentlest way to start, but the odds for market success are heavily stacked against any new product. The best way to beat the odds is to be aware of them and to understand the causes behind them — know thy enemy.

If you’ve been involved in developing and launching new products for a while, you have probably experienced a few flops along the way. Welcome to the club! But how common is failure for new products? There is a lot of anecdotal evidence, but what about actual numbers to backup and quantify our experiences? During my tenure at Google I’ve participated in many product discussions and I now have two of the company’s guiding principles embossed in my brain: 1) Data beats opinions, and 2) Say it with numbers. Fortunately, when it comes to new product failure there is plenty of data available.

Every year, companies launch thousands of new products of all types and in all markets–with each team believing and hoping that “This is the one.” All of these launches are carefully followed and tracked by various market research companies. One such company, Nielsen, has been analyzing thousands of worldwide product launches for a long time. Here is a summary from one yearly report:

What year was that? You may ask but it does not matter.

The results are remarkably consistent from year to year. There may be minor annual variations, but Nielsen summarized its many years of research and analysis of what it labels “historical new product performance” and assigned it a failure rate of around 80%. Ouch.

Now, it may be true that some research companies define failure/disappointment or success differently, and that some markets may be more or less brutal and competitive than others. Even with the most lenient definition of failure in the most accepting and open-minded markets, the overwhelming majority of new products will fail.

But why is that? Is there a primary cause for all these failures?

The most common response is to blame “execution” somewhere along the way. But whose execution? At what stage in the process? Answering these questions is a challenge because after a market failure there is a lot of finger pointing. As the saying goes, success has many fathers while failure is an orphan. What does the research show?

Unfortunately, the causes behind market failures cannot be quantified or categorized as neatly as the number of market failures. There is little doubt that bad design, missing key features, poor reliability or performance, wrong pricing, a bad marketing campaign, a poorly timed launch, etc., …can doom a product. An inexperienced team may make one or more critical mistakes in any of those areas; but many new products fail in the market even when they are competently executed by experienced teams. Double ouch.

There are, in fact, many cases where the same company and people responsible for a hit product fail to achieve even mild success with one or more follow-up new products. Same company, same team, same resources and expertise, same market knowledge, goodwill, etc., and very different results. Past performance may still be the best predictor of future performance; but the odds for failure still trump (and trample) previous success records and competent execution.

The numbers and the data are so compelling and consistent that I decided to summarize and formalize them into a law:

In criminal law, a person is presumed innocent until proven guilty. When it comes to market law, we should presume a potential new product to be a failure–at least until we’ve collected enough objective evidence to make us believe otherwise.

You may be thinking, “Thanks for that morale booster, Alberto. Now what?”

I had warned you that this series of articles would begin on a somber note. My goal is not to discourage, but to provide a realistic assessment of the odds faced by anyone involved in delivering new products to market.

The great news is that we got the tough stuff out of the way early and once we acknowledge and accept The Law of Market Failure we can begin to study it and develop ways to deal with it. And that’s exactly what I will cover in my next article; we are going to look at “F.L.O.P. Analysis” – a way to categorize the most common causes of new product failure, so we’ll know where to strike. It will be the beginning of our journey from likely victims of The Law of Market Failure to likely victors over it.

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PS I finally published a whole book on this topic.

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