Many innovators have succeeded despite initially having no demand for their products. Their secret? They created their own markets through original business models. A quintessential example is Haloid, a 1950s pioneer in photocopier technology.
It’s the 1950s, and a young inventor named Joe Wilson has developed a new photocopying technology. He founded the company Haloid to market his first machine, the bizarrely named “Model 914”. But he faced a challenge: the typical photocopier at the time cost about $300 ($3,200 today). It was used to make an average of 15 to 20 copies a day, and 90% of users made fewer than 100 copies a day. In other words, making a photocopy is a rare act because it’s expensive and complicated, and the result is mediocre (thermal paper is used). Manufacturers sell the machine at about the cost of production and make their money on consumables, a model we see today with inkjet printers.
The 914 can make copies easily and on standard paper pages, which is a great advantage, but its production cost is at least $2,000 (currently $20,000), six times higher than the competition. Obviously, this is a problem: how can you justify such a huge investment for so little use? The 914 has all the makings of an answer to a problem that doesn’t exist, a very common situation for a startup. A market study commissioned by Arthur D. Little, a highly respected consulting firm specializing in technology, concluded: “It is very difficult to identify a specific application for which the Model 914 is uniquely suited compared to other devices.” In essence, the firm believes that there is no market for the Model 914.
In their study, the firm’s analysts assumed that the 914 would be sold using the competitors’ business model, which is to charge the customer the full price of the machine, plus additional charges for consumables (special paper, special solvent, etc.) Quite logically, their conclusion was: “While the Model 914 is admirably suited for a few specialized applications, it has no future in the copier market.” In desperation, Haloid tried to sell itself to Kodak and IBM, the leaders in the copier market, but they came to the same conclusion and didn’t pursue it.
Haloid has reached a dead end. His machine is only interesting to a large number of users, and customer usage is very low. There is no demand. Then an idea occurs to him: What if we could find a way to increase usage? If usage increases, our machine becomes interesting. Haloid’s solution to this problem is simple, brilliant, and groundbreaking. It’s based on the observation that nothing encourages the use of a resource more than the fact that it’s free. And so, on September 26, 1959, Haloid launched a new offer: instead of selling, the machine was rented, for a modest fee, with the possibility of canceling the contract at any time. No risk for the customer. What’s more, the first 2,000 copies were free. Free of charge! At the time, 2,000 copies was more than three months’ worth of copies for the average customer. Then you pay per copy. Three months of free copies? It’s like an all-you-can-eat buffet, and customers sign up in droves. And what happens? Exactly what Haloid’s managers predicted: free access combined with simplicity led to an explosion in usage. Usage quickly reached 2,000 copies per day, boosting Haloid’s sales and catapulting the company to the top of the market. To mark the occasion, Haloid changed its name to Xerox and became one of the great technology companies of the 20th century. Remember, there was “no market” for the Xerox photocopier.
Four lessons for innovation
What lessons can we learn from this amazing story? I can think of at least four. First, market research in a disruptive situation is inherently fragile. It looks at what is, not what can be. Strictly speaking, you can’t blame Arthur D. Little’s consultants for anything, except perhaps that they’re not always the best at what they do. Little’s consultants, except perhaps for accepting the assignment.
Second, the job of the disruptive innovator is not to study the market, but to create it. The lack of demand for the 914 is not an obstacle; it’s simply the starting point for a process that must be creative, and one that management has embraced. How do we make our product meaningful? It only makes sense if the use of copies is strong. How do we make that use strong? One way is to make copies free. It seems obvious in retrospect, but at the time it was a stroke of genius.
Third, this example highlights the notion of the interdependence of the parameters of a problem. Usage is not an isolated parameter, a natural factor that can only be observed, like a temperature. We can establish a link between this usage and the business model (in this case, the pricing model) and take advantage of the link established. In a complex and uncertain situation, identifying connections between parameters can be a source of creativity.
Fourth, the creative process is all about the business model. A technology that makes little sense in a given business model, usually the current model of the dominant players, can express its full potential in another model. The challenge for the innovator is to create the right model for his or her technology. It’s not enough to have a good technology or to have obvious advantages. Here, Xerox’s business model perfectly fulfills the two key roles of a model: facilitating adoption by reluctant users and ensuring long-term value creation and capture. There has to be a good balance between the two: if you lower prices too much to facilitate adoption, you don’t create value. If you protect value creation too much, you block adoption.
No market? Create one!
Finally, when we hear that there is no market for a new product, it may mean that the innovator hasn’t bothered to work on a relevant business model. It’s very rare that there is a demand waiting patiently to be satisfied. What gives a new technology meaning is its business model. No market? Create one!
🔎 Source for this article: Henry William Chesbrough & Richard S. Rosenbloom, The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spin-Off Companies, Industrial and Corporate Change 11(3) June 2002.
🇫🇷 A version in French of this article is available here.
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