Unpacking Innovation Diffusion Theory - Part 1: Relative Advantage

In a recently published post, “Has the core of innovation changed?”, I shared an overview of some aspects of Everett M. Rogers’ classic book, The Diffusion of Innovations. Everett’s thinking and research on this topic is vast and full of insight. But I wanted to focus on five main attributes that he identified as determining the rate of uptake of any innovation: (1) relative advantage, (2) compatibility, (3) complexity, (4) trialability, and (5) observability.

Over the coming articles, I will expand on each attribute above, sharing what they mean and valuable insights from past case studies. One of my main goals is to show that these powerful tools, built by rigorous research & thinking) apply to understanding recent innovations, including embedded finance, identity proofing, and other emerging trends.

In this first article in the series, I’d like to focus on Relative Advantage. Everett’s definition of the term is worth quoting - it is:

“the degree to which an innovation is perceived as better than the idea it supersedes, by a particular group of users, measured in terms that matter to those users.”

So’ relative advantage’ is not only about objective criteria but also about how a specific innovation is perceived within a social context. For consumers, the social context may be peers and others with whom they interact. Within organizations (whether private or public), the social context is both other members of the group (colleagues, etc.) and also similar organizations (e.g., competing businesses).

So relative advantage is a mix of perceived and objective value. Customers perceive new ideas or technologies and how they use them in the context of their social environment, not only the objective change it brings to that environment. Because of this, some may use the terms relative advantage and perceived usefulness interchangeably. However, other research (Relative Advantage and Perceived Usefulness: The Adoption of Competing ICTs) showed that viewing a new idea/technology through the “relative advantage” lens is more appropriate because it helps users consider the comparative advantages of competing technologies.

Now, let’s move on from definitions to making this real - let’s apply this aspect of Everett’s framework to a couple of modern-day examples of innovations impacting financial services and the wider world:

Embedded Finance is an excellent example of relative advantage in action. Embedded Finance (EF) is “the integration of financial services or tools – traditionally obtained via a bank – within the products or services of a non-financial organization.”

• EF creates a significant relative advantage for many stakeholders - for end consumers or businesses; for companies adding it to their existing offerings; and for banks who ultimately make it possible. EF makes it possible for companies who would like to provide financial convenience to their customers to do so without needing to manage the risk, regulations, and compliance faced by financial services firms.

• One of the earliest examples of EF was Uber, when they embedded payments seamlessly into their ride-sharing app. More recent examples are the rapid growth of buy-now-pay-later (BNPL) options for consumers within many e-commerce sites over the past few years. This trend will accelerate as it delivers on the ‘relative advantage’ criterion in a significant way.

Identity Verification is another area where we have seen innovations gaining much traction. Over the past few years, digital onboarding in financial services (esp. banks) and other areas (e.g., age verification) has been growing - with the pandemic accelerating the trend.

• The relative advantage of digital onboarding vs. older approaches is clear. But with it comes the critical need to check and verify the identity of individuals during any digital onboarding process - without it, levels of fraud and identity theft increase.

• New technologies (innovations) that use biometric data capture and image recognition on mobile devices, combined with checking this against other data, make it possible to verify identities accurately and quickly. The relative advantage of identity verification for businesses that deploy it is clear – lower risk and costs. But unless the user experience of this verification is well-designed, the relative advantage for end consumers is not as great - unless they become victims of fraud. Innovation in this space must constantly balance identity verification’s friction against a poorer UX. Technologies that speed up the verification process and improve the UX can significantly impact business outcomes.

While all five of the attributes identified by Everett in ground-breaking research (at the time) matter, perceived relative advantage in the minds of end users is one of the most important. The overall framework is a simple (yet powerful) way to assess the odds that a particular innovation or technology will ultimately be widely adopted.

Leaders who want to innovate (bring new ideas successfully to market) can also leverage other methodologies, including the Wheel of Innovation, to understand and strengthen their organization’s innovation capabilities.

In future articles, we will explore this, as well as the other four attributes in Everett’s model, and use this to understand other hot topics in today’s markets, e.g., the metaverse. Stay tuned!