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Product Innovation: Meaning and Explanation

Updated on March 26, 2020 · By Ahmad Nasrudin

Product Innovation Meaning and Explanation
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Product innovation is the introduction of something new for a product. It does not always come with new products, but also by enhancing performance and adding new features to existing products.

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If the company produces smartphones with more significant memory, we call it product innovation. The iPhone at the time of its appearance was also product innovation. Or, embedding Siri in the iPhone is also an innovation.

What is the difference between product innovation and process innovation?

Product innovation contrasts with process innovation. The first emphasizes output, while the latter emphasizes the production process.

Process innovation requires manufacturers to make existing products in new and cheaper ways. That enables companies to create more value by lowering production costs.

Take, for example, Toyota’s lean production system. The system helps increase employee productivity, giving Toyota a cost-based competitive advantage.

Why does product innovation matter?

Innovation should allow a higher demand for a product. It came for several reasons such as:

  • Technology advances. Imagine, smartphone manufacturers still use 2G networks instead of 4G. Or, newspaper companies stay focused on conventional business models rather than online. What happened?
  • Changes to customer requirements. Customer’s tastes and preferences keep changing. It urges businesses to innovate. If not, there is no demand for their products.
  • Outdated product designs. Why is the physical keyboard on the smartphone gone? Because it is less convenient and wasting your time just for typing. Design innovation increases the feasibility, viability, and desirability of a product. 

Innovation increases the desirability of a product. By innovating, the product becomes more valuable for consumers. Because it’s more desirable, often, customers are willing to pay a higher price. And of course, that increases the company’s pricing options.

Companies that bring innovation to the market face a less elastic demand curve. That means demand is less sensitive to price increases. Thus, it provides an opportunity for businesses to increase prices and get economic profit.

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How does it work

Product innovation comes in three ways:

  • New product development. An example is the launch of the Amazon Kindle.
  • Improved performance of existing products. For example, the newest smartphones use a higher resolution camera.
  • Adding new features to existing products such as power windows on cars.

Pros and cons

Innovation offers benefits for businesses to grow and expand. Innovation makes products more attractive. So, it not only creates new demand, but it can also attract existing customers from competing brands.  

It also gives companies a competitive advantage. By differentiating their products from competitors, companies will be able to reap higher profits.

But innovation doesn’t come without costs. Companies must consider the additional costs and additional revenue generated from their innovative products. That will maximize profits when the marginal cost of innovation equals marginal revenue of innovation.

The company also faces a high risk of failure. Innovation requires an injection of capital and time to develop. However, instead of creating demand, it reduces demand because it does not suit the tastes and preferences of consumers.

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