Modeling the Role of Risk-Adjusted Utility in the Diffusion of Innovation

The authors present a diffusion model in which individual consumers adopt an innovation if its risk-adjusted utility exceeds a reservation utility threshold. This threshold may be a function of innovativeness and existing product holdings. As the new product is adopted, remaining consumers learn more about it, leading to higher perceived utility and reduced consumer uncertainty, and raising the risk-adjusted utility of the innovation. Consumer heterogeneity with respect to -the potential benefit of the innovation drives the process of diffusion; i.e., those with a lower need will wait longer for greater perceived benefits or to resolve more uncertainty before adopting. The individual level-formulation of the model provides a number of benefits. Firstly, other marketing phenomena (e.g. marketing mix variables and inaccurate initial perceptions of the innovation) may be modeled in a grounded way, building on previous work in consumer behavior. Secondly, the model can claim more process validity than those aggregate diffusion models which have purely an aggregate-level interpretation. Thirdly, a mix of individual-level data (market research) and aggregate data (early sales figures) may be used to calibrate the model. The authors provide empirical tests of the proposed model against existing diffusion models based on the Bass model (1969), and discuss the research implications of the proposed model.