Whether a company is creating a new product or improving an existing one, product innovation describes its ability to meet customer needs and desires by developing new products or services.
What is Product Innovation?
At its core, product innovation is the process by which a company meets the unmet needs of its customers (or prospects).
But the concept of product innovation process is multifaceted—and often misrepresented.
Here’s a breakdown of product innovation, what it is, and what it isn’t:
- An innovative product isn’t always a “new” invention. Companies like Google, Apple, Salesforce, and Airbnb are the one-in-a-million examples of businesses that innovate by inventing something entirely new.
- Innovation is often based on customer feedback or insights gained through research and testing. Companies use feedback to inform their development process, such as surveying customers (or competitors) to find out what features they would like or testing prototypes on a small scale.
- Product innovation may also involve improving existing products and services. For instance, introducing additional features or incorporating customer feedback into the design.
- Development for innovative products is usually predictable and research-based. Companies use market research data, focus groups, and software simulations to reliably develop a marketable product.
- Successful product innovation is based on competitive advantage, not selling everything to everyone. Product-market fit is more important than selling to as many potential customers as possible.
In short: Companies don’t need to be the next big thing to be “innovative.” They just have to serve their target customers well. To do that, they need the right software, customer data, and market research.
- Incremental product innovation: A type of product innovation involving the improvement of existing products, services, and processes.
- New product development: Building a new product from scratch to meet an unmet market demand.
- Product design innovation: Designing a product to increase its desirability, performance, and/or cost-effectiveness.
- Product innovation process: The process by which products are designed, developed, and brought to market.
- Product innovation strategy: The approach (or set of approaches) a company takes to meet its customers’ needs successfully.
Why is Product Innovation Important?
“Innovative” products determine the success or failure of a business. But, according to the famed Harvard Business School professor Clay Christiansen, 95% of them never succeed.
Nevertheless, product innovation remains a critical aspect of business strategy for several reasons:
- Satisfying evolving customer needs. In today’s fast-paced world, businesses that adapt to changing customer preferences can ensure customer satisfaction and retention.
- Staying ahead of the competition. As industries become increasingly saturated, unique and targeted products set them apart from the rest.
- Driving growth and profitability. By creating new products or improving existing ones, businesses can create new revenue streams and increase profitability.
- Adapting to market changes. Technological advancements, new regulations, or other external factors are putting companies out of business more quickly. Without an innovation strategy, companies can’t anticipate, plan for, and respond to these changes.
- Fostering a culture of innovation. When a business is focused on product innovation, it cultivates a culture that encourages creativity, critical thinking, and collaboration. This mindset permeates the entire organization, resulting in a more dynamic, resilient, and forward-thinking business.
- Enhancing brand reputation. Companies known for their innovative products see increased customer loyalty and trust. They also find it easier to attract top talent and partners, further fueling their growth and success.
Types of Product Innovation
There are two main types of product innovation: radical and incremental innovation.
Radical Product Innovation
Radical product innovation refers to the development of entirely new products or services that have the potential to disrupt existing markets or create new ones.
A significant departure from current offerings characterizes this type of innovation, which often involves groundbreaking technological advancements or novel business models.
Examples of companies and industries using a radical innovation strategy include:
- Tesla: Tesla’s electric vehicles revolutionized the automotive industry by offering eco-friendly, high-performance, affordable alternatives to traditional internal combustion engine cars.
- Netflix: Initially a DVD rental service, Netflix shifted its business model to focus on streaming services, transforming how people consume movies and TV shows.
- Amazon: Amazon disrupted the retail industry by creating an online marketplace that offers a wide range of products, making it easy for customers to shop and compare prices from the comfort of their homes.
- Biotechnology: Developments like CRISPR’s gene-editing technology represent a radical innovation that transforms medicine and treats various genetic disorders.
Radical innovation is less common—and riskier—than incremental innovation, but it can also lead to game-changing business results.
Incremental Product Innovation
Incremental innovation involves smaller, continuous improvements to existing products or services.
This type of innovation is focused on enhancing product performance, functionality, or customer experience, often in response to customer feedback, market trends, or competitor actions.
Examples of product innovation occurring incrementally include:
- Consumer goods: Companies in the consumer goods industry often invest in product discovery to create new varieties that respond to market demand. For example, makeup and cosmetics brands develop new products based on social media trends and gauge their success based on sales data and customer feedback.
- Fast food industry: Fast food chains like McDonald’s and Burger King regularly update their menus and introduce new products (e.g., vegan/vegetarian options) to cater to evolving customer preferences and dietary trends.
- Software companies: SaaS companies (including DealHub) create software tailored to specific market segments, rather than inventing a new type of software altogether. Over time, they improve their products to deliver better results for those specified groups.
There are plenty of reasons making incremental improvements is the most common approach to product innovation.
One explanation is the MAYA (Most Advanced, Yet Acceptable) Principle, which states that customers will buy a product when it is slightly better than what’s currently available. If it is too different from current technology, they will struggle to adopt it.
Incremental innovation gives companies the opportunity to create more products with shorter development cycles, since they don’t need to start from scratch each time.
It also allows them to test ideas and gather customer feedback quickly, giving them the chance to make adjustments and further develop the product.
Product Innovation Challenges
Such a low innovation success rate underscores the challenges associated with product innovation.
From product testing to impact measurability, every step of the process poses difficulties for product developers.
Testing and Time-to-Market
Testing is a crucial aspect of product innovation, as it helps companies identify potential issues, validate their ideas, and ensure that products meet customer needs and expectations.
But with increasing product complexity and new rungs on the corporate ladder, many organizations (especially enterprises) struggle to innovate effectively.
- In large organizations, bureaucracy and red tape can slow decision-making, leading to testing and product launch delays.
- Buy-in from executives and other key decision-makers is difficult, especially when the potential return on investment is uncertain.
- Different stakeholders have conflicting interests, which can lead to disagreements about the direction of the project and further delays.
- The need for agility is at odds with the slow-moving nature of corporate decision-making and resource allocation.
Another challenge in product testing is creating realistic testing scenarios that accurately represent real-world usage.
Organizations may have difficulty creating scenarios that account for all variables influencing product performance and user experience.
Another major challenge associated with product innovation is the cost involved in developing and launching new products or services.
Several factors contribute to the high costs associated with innovation:
- Research and development
- Prototyping and testing
- Manufacturing and production
- Intellectual property protection
- Marketing and promotion
- Risk of failure
For small, agile companies, the risk of failure and rising research and development costs are the biggest challenges—especially if they have already raised a round of capital.
For established enterprises, the challenge is balancing innovation costs with the promise of long-term rewards.
Although they can spend more time and money on product discovery, they can’t pivot as quickly. They can easily be out-innovated by a new entrant.
Companies need to factor R&D, manufacturing, marketing, and distribution costs into their product pricing.
The challenge lies in determining a price that allows the company to recover these costs while remaining attractive to customers and competitive in the market.
In industries with low price elasticity, this means new market entrants sometimes forfeit profitability in favor of market share (Tesla is a well-known example of this).
A majority of global executives (74%) see skills deficiency as a problem within their industry. As a result, 64% of them face limitations in innovating, a problem that has worsened over time.
Especially as the rate of innovation increases, finding talent with the right combination of technical, creative, and analytical skills is getting harder.
Most tech businesses focus on upskilling their current employee base, which comes with its own challenges—namely, difficulty in retaining specialized talent and the costs associated with training.
Inability to Measure Impact
With numerous factors influencing the success of product-led growth, isolating the effects of innovation can be complex.
Companies often struggle to define metrics and measure the ROI of new products and the process behind their development.
Without reliable metrics, it’s hard to determine whether a product is successful, which can make decision-making difficult and hinder further investments in innovation.
Top Reasons to Invest in Product Innovation
Whether “innovation” entails developing product features, tailoring a product to a niche market, or creating entirely new products, investing in product innovation is a critical element of competitive advantage and long-term growth.
Employees value innovation.
81% of employees at digitally mature companies (i.e., those that most actively embrace digital tools and processes) consider innovation a strong quality of their organization.
Especially considering the challenges of talent acquisition and retention, businesses that want to reach digital maturity through their products need to meet their employees halfway by investing in innovation.
Successful companies are losing to new market entrants almost four times as fast.
In the late 1950s, the average lifespan of companies listed on the S&P 500 was 61 years. Now, it is less than 18 years.
McKinsey predicts that by 2027, around 75% of the companies currently listed on the S&P 500 will no longer exist.
Companies that don’t evolve their product catalog will be phased out by those that better meet customers’ unmet needs (at a faster rate than ever).
Innovation drives companywide efficiency.
Innovation is more than just a competitive benchmark of success. It can drive efficiency across the board, from reducing costs to improving customer satisfaction and increasing product reliability.
Examples of product innovation making a companywide impact include:
- Automating processes with artificial intelligence
- Moving to cloud-native architectures and virtualized infrastructure
- Using data analytics to improve customer segmentation, price optimization, and GTM strategy.
Such investments boost efficiency, reduce redundancies and inefficiencies, and make the organization agile.
Stages of the Product Innovation Process
The jobs-to-be-done (JTBD) theory provides an insightful perspective on product innovation.
It suggests that customers “hire” products or services to accomplish specific tasks or goals, and disruptive innovations depend on understanding and addressing these underlying needs.
Based on the JTBD theory and other modern approaches, here are the six steps associated with product innovation:
- Identifying customer needs. The first (ideation) stage of innovation is identifying customer needs. Companies can do this by talking to customers, competitors, and industry experts, studying competitor products, and analyzing data sources such as surveys or customer feedback.
- Defining and quantifying new product opportunities. After identifying needs, companies can generate new product ideas, then narrow them down based on how profitable they can be for the company as it currently stands.
- Developing a product concept. Only after understanding customer needs can an organization begin concept development and prototyping. Through this stage, the groundwork laid in the first two stages will guide the product design and development process.
- Testing and validating the concept. Testing involves grouping pilot customers into cohorts and showing them prototypes of the product. This helps to determine customer preferences, identify potential usability issues, and assess market demand for the product.
- Launching the MVP. The last stage of innovation is launching a minimum viable product (MVP). Companies can then use feedback from real users to refine their MVP before rolling it out as a
- Launching, scaling, and improving the new product. Post-launch, the organization will continually develop an improved version to match evolving customer needs.
Product Innovation Tools
Like most facets of business operations, process automation and granular data reporting are at the heart of product innovation.
Here are some tools and software solutions critical to successful product development:
Project Management Software
Project management software comes in all shapes and sizes from low-cost tools like Trello to comprehensive project management suites like Jira.
Product development usually requires the latter—a suite offers a centralized view of the entire product development process and helps to coordinate multiple tasks while tracking progress.
Plus, it integrates with other project-related software such as bug tracking and version control systems.
EaaS is an emerging technology that allows software application developers to deploy, manage, and scale cloud-based applications without worrying about underlying infrastructure.
EaaS solutions such as Amazon Web Services (AWS) give developers access to a complete development and deployment environment in the cloud that includes virtual machines, databases, and storage.
It saves companies money on development and testing by allowing developers to test their applications in the cloud instead of on physical machines.
Most don’t think of CPQ software as a product innovation tool. But its ability to capture customer data about which product configurations sell and which don’t is invaluable for product innovation.
Although CPQ is primarily used as a sales tool, the data it collects from new deals shows product developers which customer needs the company’s product suites are meeting, which ones to improve, and which ones to double down on.
People Also Ask
What is the most common type of product innovation?
Incremental innovation is the most common type of product innovation. Since most companies already operate in a crowded market, incremental innovation is the easiest way to update existing offerings. This approach includes adding features, adjusting pricing models, and improving customer experiences.
What is the difference between product and process innovation?
The main difference between product and process innovation is that product innovation focuses on developing new features or altering existing ones to make products more attractive to customers. Process innovation describes improvements to a company’s production and delivery processes to increase efficiency and reduce costs.
What are the seven pillars of innovation?
In the context of innovation culture within an organization, the seven pillars of innovation are as follows:
Institutions, Human capital and research, Infrastructure, Market sophistication, Business sophistication, Knowledge and technological performance, Creative outputs
What are the different types of product innovation frameworks?
In the 1990s, innovation consultants at Doblin created the 10 Types of Innovation Framework, which includes:
Profit Model, Networks, Structure, Process, Product Performance, Product System, Service, Channel, Brand, Customer Engagement
Each area can be divided into three subcategories—configuration, offering, and experience—which provide insight into a product’s design and performance, customer relations, and emotional connection to customers.