“Better Place Chief Executive Officer, Dan Cohen, said: ‘This is a difficult day for all of us. We have come a long way in order to bring about a global vision. From the start, Better Place was a breakthrough for the infrastructure of the electric car industry and successfully completed the development of its technology and infrastructure. Israel was the first place in which an electrical car could travel without limit.
Unfortunately, after a year’s commercial operation, it was clear to us that despite many satisfied customers, the wider public take up would not be sufficient and that the support from the car producers was not forthcoming.”
With more than $850 million invested, strong government backing, and years of development, Better Place seemed poised for success. The Better Place cars actually perform quite nicely and they don’t at all look out of place on the road (see picture below). So how did Better Place land in the ditch?
Better Place has suffered the fate of many revolutionary startups: too much innovation and not enough incentive for consumers to buy. Let’s look at each of these in turn.
Better Place overcame enormous technological barriers to create the first real electric car ecosystem in the world. The company introduced the following innovations to deliver on its promise of a completely electric solution.
- A nationwide network of battery replacement stations that replicated the "fill and go" gas station experience of replenishing a car’s power source within minutes.
- A unique software tracking system that monitored power usage and guided drivers to nearby battery replacement stations before the batteries went dead. The system was designed to alleviate drivers’ ‘range anxiety’ of being stranded on the side of the road with a dead battery and a useless gas can.
- A conventional full-size car (made by Renault) that could handle a family of five with room for luggage.
- Recharging pods conveniently located at homes, places of business, and in public parking facilities.
Without a doubt, economics plays a large part of the company’s failure. The financial incentive to switch to electric cars never materialized. When the cars hit the road in Israel in 2012, the cost of the Better Place car, a modified Renault Fluence, was roughly $30,000. This was approximately the same price as its gasoline-powered twin, even considering the significant sales-tax break (8% versus 83%) given by the Israeli government for the electric version. And despite the cost of gas running over $7 a gallon in Israel, Better Place was still unable to offer operating-cost savings to consumers.
But there is more to the story than pure economics. The fundamental error of Better Place was favoring revolution over evolution--namely, creating too many business, technology, and consumer behavior changes at once. This combination of changes reduced people’s appetite for the electric car experience:
- Removing consumer "freedom of choice"-–Better Place offered only one car. The "one size fits none" option doomed Better Place to a small market segment. More important, it eliminated the young, urban, green audience that was most likely to purchase the car.
- Not providing an acceptable alternative (like a small gas engine) to allay people’s range anxiety. The complex tracking software and network of recharging stations did not effectively deal with the psychological fear of running out of juice. Plus, the small range of the car (roughly 90 to 100 miles) meant the system could not effectively scale.
- Not proving the efficacy of the system before rolling it out to the general public. For example, testing the system with fleet cars and trucks that traveled well-defined urban routes would have been a more effective method of demonstrating that the system worked, before betting the farm on a national rollout.
- Providing a safety net for those customers who took a chance on buying a Better Place car, to allay the fear of losing their money. These folks are now trying to figure out what to do with their electric cars.
At the end of the day, Better Place made the same mistake that many other inventors make; believing that their system is so compelling that they become oblivious to the resistance to change that consumers typically exhibit. This mistake is well-documented in John Gourville’s landmark Harvard Business Review article, “Eager Sellers and Stony Buyers.”
Employing the Endowment Theory of Economics, Gourville explains why many new inventions fail, citing "a mismatch of 9 to 1 between what innovators think consumers want and what consumers actually want," in what is now called the 9X problem. The 9X problem means that consumers need to rate a new alternative as 10 times better than what the incumbent is offering in order to switch. The endowment theory states that we mentally compare having the prospective item in exchange for what we already have. Since people are naturally loss-averse, the prospective gain of a new invention has to be quite large to overcome our sense of potential loss. Simply put, Better Place was not seen by consumers as 10 times better than the gas engine alternative.
The endowment theory helps explains why evolutionary approaches to technology innovation are often the favorable option. Creating a new innovation that is 10 times better than what we have does happen (for example mobile telephones, the Palm Pilot, etc.), and when it does happen, it often creates a real market transformation. But these changes are the exception rather than the rule. Better Place turned out to be the rule, not the exception. It is far more likely that the winner in the mass-market electric car sweepstakes will be a player who takes a more measured, evolutionary approach.
Author David Lavenda is a product strategy executive at an innovative high-tech company. He also does academic research on information overload in organizations, and he is an international scholar for the Society for the History of Technology. He tweets from @dlavenda.
[Image: Flickr user Keoni Cabral]