In the digital age, companies are constantly releasing improved versions of their products to capture value from their digital innovations. This process of generational product innovation (GPI) brings several benefits, such as faster and less costly iteration compared to upgrading hardware. However, a 2021 study from Singapore Management University warns that this strategy can have a downside. The paper highlights that upgrading products may alienate customers who have already invested a great deal of time and effort in getting used to a particular operating system. The negative effect of this strategy can be particularly damaging for firms that initiate numerous changes. The study, titled “Growing Pains: The effect of generational product innovation on mobile games performance,” has implications for our understanding of digital transformation in general, as digitizing production processes and business models inevitably involve upgrades and iterations.

The Impact of Digital Innovation on App Developers

The study focuses on mobile app games in particular, in part due to access to data from 58 countries held by an analyst firm in the mobile intelligence sector. The researchers conducted interviews with several app developers, who described upgrading as a question of life and death for a mobile game. The best way to survive is to update new content regularly, and major updates have the highest potential to generate revenues. Innovators want to make sure that they get to make money out of their new innovations or products. While that usually involves intellectual property and copyright protection, software development has unique challenges due to the speed of innovation in the sector. It’s hard to patent a piece of software, and many software companies are small-scale studios that lack the resources of large manufacturing firms.

The study’s methodology employs a difference-in-differences (DID) approach. The researchers compared the performance of almost identical apps, although the upgraded version may have been released first on a different platform to the previous version. The timing of a major upgrade isn’t always the same for exogenous reasons. Sometimes approval time in iOS takes longer than for Android, and sometimes it’s the other way round and it’s pretty random. The researchers take advantage of the variation, which is beyond the control of the app developers themselves. They only look at the performance of the app that receives the major upgrade and compare that with the same app on the other platform. The good thing is that the app that didn’t get upgraded, its performance wouldn’t change a lot as nothing had happened to it.

The paper states that while product upgrades are released with the intention of capturing value, “they may also impose learning costs upon customers, which can be value-destroying.” The upgrading process can take a little getting used to, and whenever you introduce new features and functions to make it more fun for the gamers, you actually make some of their competencies and skills irrelevant at the same time. So, they need to re-educate themselves and re-establish a set of routines to outcompete other gamers. This cost of upgrading is the sort of cost that the researchers are getting at.

Advice for Software Firms Producing Mobile App Games

From the users’ perspective, at least in the beginning, they probably would become overwhelmed by short-term costs or adjustments. They need to tolerate these and not become overwhelmed, otherwise, they’ll probably ditch the app before realizing any long-term benefit. Thus, the issue here is that it creates a window of opportunity for competitors to take advantage of. Whenever you release a major upgrade, that will hurt your performance in the short term until users feel the benefits outweigh the costs. Products have lifecycles, as does generational innovation. The more you innovate, the more likely it is you’ll get exposed to risks. And your competitors might be able to take advantage of this and gain more users from you by releasing promotions, just as your users are experiencing disruption.

However, there may be some moderating effects when it comes to games developed by market leaders. Users still experience a decline in performance, but they’re probably more tolerant. They want to stay in the game because it’s popular. Therefore, the study suggests that there’s a long-term benefit to generational innovation for companies. Nevertheless, companies must be aware of the potential downsides and try to minimize the impact on their users.

Digital transformation brings benefits as iterating software is much less costly and faster than upgrading hardware. However, the upgrading process may have a downside. Upgrades may impose learning costs upon customers, which can be value-destroying. Companies seeking to capture value from their digital innovations should be aware of the potential downsides and try to minimize the impact on their users. Provided they do so, generational innovation can bring long-term benefits to companies.

Technology

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