flevyblog

Flevy Blog is an online business magazine covering Business Strategies, Business Theories, & Business Stories.
MANAGEMENT & LEADERSHIP STRATEGY, MARKETING, SALES OPERATIONS & SUPPLY CHAIN ORGANIZATION & CHANGE IT/MIS Other

Why People Won’t Buy Your Product Even Though It’s Awesome

Editor's Note: Take a look at our featured best practice, Product Lifecycle (34-slide PowerPoint presentation). Product Lifecycle Analysis is an invaluable tool for developing a robust product marketing strategy. Marketers and strategists can use this analysis to predict sales growth, associated customer and competitor behaviors, and, in turn, devise the appropriate product marketing strategy. The Product [read more]

Also, if you are interested in becoming an expert on Strategy Development, take a look at Flevy's Strategy Development Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

* * * *

It’s a common business problem faced by any size company, big and small.

The situation is you’ve developed a brilliant product.  Compared to the incumbent or existing way of doing things, your product is more feature-packed, is easier to use, and is more economical to the customer.

The problem is your sales suck.  Why aren’t customers banging down the door?

Are customers irrational?

The answer is “yes.”  Numerous studies have showed that consumer behavior is irrational.  If you assume otherwise, then you are also behaving irrationally.

To understand why people aren’t buying your product, it is imperative to understand some key concepts in behavioral economics.  Here are three important principles to be cognizant of.

Principle 1. Losses Loom Larger than Gains

Every new product provides perceived gains and losses for the customer.    These gains and losses need not be financial.  For example, let’s say you are starting an online grocery store for your municipality.  With the promise of groceries delivered to the door, the perceived gains could be convenience, time savings, and effort savings.  On the other hand, you are altering the way the customer performs a certain process–buying groceries.  This change will translate to perceived losses (i.e. financial and non-financial costs), which can include the inability to handpick produce and meat, delivery fees, and having to be home during the delivery window.

When we look at this objectively, online groceries is a clear superior choice.  Convenience, time savings, and effort savings are great value propositions, after all.

However, when the customer evaluates options subjectively, it becomes unclear whether online groceries is the still better choice.  In fact, it is likely the customer views online grocery shopping as the poorer choice.  This is because losses loom larger than gains.

A consumer has an inherent Consumer Bias.  This bias weighs a loss three times that of  a benefit.  To put it another way, the objective value of a gain needs to exceed the objective value of a loss by three times for the customer to perceive the new product as better than the existing.

Principle 2. Reference Points Matter

The second principle to understand is different people have different reference points.  These reference points matter.  The reference point simply refers to the person’s current state of being.

Continuing our online grocer example, the reference point of a typical customer is someone who currently goes to the physical supermarket to pick up groceries.  This process may already be part of the customer’s weekly routine.  Gains and losses are relative to this state of being.

For two people with different reference points, a gain for one person may be perceived as a loss for the other.  To illustrate this concept, let’s look at the price of gas.  Assume the average price for a gallon of gas in the US is $3, whereas it’s $10 in the UK.  If a US customer came upon a gas station charging $6.50/gallon, she would be furious.  If a UK customer came upon the same situation, she would be ecstatic.  (Also, note that even though the objective difference is the same for both customers, the US customer’s sentiment would be more affected than that of the UK customer, because losses loom greater than gains.)

Prospect Theory Value Function

The Value Function Illustrates Objective vs. Subjective Values

By understanding your customer’s reference point, you can determine her perceived gains and losses.  In most cases, your reference point is different from that of your customer’s.  This is because you have already used and experienced your product, whereas your customer has not.  Your product has become part of your state of being.  This disparity in judgment is captured in the concept known as the Innovator’s Curse.

Principle 3. Endowment Effect

According to the Endowment Effect, people value items in their possession (i.e. part of their endowment) more than items not in their possession.  This is because people are loss averse.

This behavior sheds some light on why losses loom larger than gains.  If a customer is already accustomed to an existing product or existing way of doing things, it becomes hard for her to give that up and change–even if the alternative presents greater benefits.

Are any of these principles hindering your sales?

Recognizing and understanding these three principles of behavioral economics is crucial.  It allows us to develop product strategies that specifically counter consumer adoption barriers at play and leverage behavioral tendencies.

Now, let’s look at three such strategies–one for each principle.

The 10X Rule

If losses loom larger than gains, then we need to create a product where the gains greatly dwarf the losses.  Create one where the benefits are 10X that of the losses, so that all economic and psychological switching costs are overcome.  This is also known as Andy Grove’s 10X Rule.  Andy Grove, Intel’s third employee and former CEO, had stated, for widespread adoption, a new product has to offer a 10X improvement over the incumbent product.

Of course, this strategy is easier said than done.

Reference Point Pivot

Since reference points dictate how customers perceive gains and losses, it makes sense to seek out customers with favorable reference points.  Think about it this way.  In one market, your product may have fulfill the 10X Rule.  In another, your same product may be perceived as 10X worse!

During its earlier years, Walmart opened stores only in rural areas to compete against local mom and pops.  Compared with these incumbent retailers, Walmart was a clear 10X improvement.  If Walmart had started off launching stores in metropolitan areas instead, where large department store chains were already established, Walmart’s growth would have been hindered.

Ideal markets are ones filled with first time buyers.  For the first time buyer, her reference point is neutral.  She doesn’t have any preconceived biases over existing benefits lost and new costs incurred, because she doesn’t currently use the incumbent solution.  Thus, for many products, it is easiest to launch in emerging markets.  This is because emerging markets (e.g. BRICS nations) are filled with first time buyers.  Read more about entering emerging markets here.

Freemium Model

The Endowment Effect has an interesting implication.  It implies the customer will spend more–mo’ money, mo’ time, and mo’ effort–to keep something she has than to obtain something for the first time.

With this insight into consumer psychology, many companies offer free samples to get customers hooked on their products.  Once the customer begins using the product, she will appreciate the benefits it offers and is likely to spend money to retain these benefits.  This is, in essence, an example of Reference Point Pivot.

Similarly, a popular business model adopted by many Internet SaaS companies is the “freemium” model.  In the freemium model, the customer is first presented with a free version of the product.  Then, the customer is offered (or forced) to a premium version.

For a more in depth discussion on product adoption, consumer psychology, and product strategies, take a look at this business document: The Psychology of Product Adoption.

Still no dice?

Of course, if your product is awesome–you think so and your customers agree–then lack of sales could be due to poor marketing.  Ramp up your marketing, sales, and biz dev efforts.

Interested in business strategy?  Check out Flevy’s collection of business frameworks, most created by former consultants of top tier consulting firms.

EDIT: I have just published a new article, The Complete Guide to Product Adoption.  This article analyzes product adoption on the market level, product level, consumer level, and tactical level; and is based on a number of established business strategy frameworks.

Please also share your thoughts, experiences, and advice in the comments.  Thanks!

38-slide PowerPoint presentation
Pricing Strategy is a core pillar of Marketing and Product Strategy. It is 1 of the 4 Ps of Marketing (also known as the Marketing Mix - Product, Price, Placement, and Promotion). As such, knowing how to properly price your product is extremely important to the commercial success and viability of [read more]

Want to Achieve Excellence in Strategy Development?

Gain the knowledge and develop the expertise to become an expert in Strategy Development. Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

"Strategy without Tactics is the slowest route to victory. Tactics without Strategy is the noise before defeat." - Sun Tzu

For effective Strategy Development and Strategic Planning, we must master both Strategy and Tactics. Our frameworks cover all phases of Strategy, from Strategy Design and Formulation to Strategy Deployment and Execution; as well as all levels of Strategy, from Corporate Strategy to Business Strategy to "Tactical" Strategy. Many of these methodologies are authored by global strategy consulting firms and have been successfully implemented at their Fortune 100 client organizations.

These frameworks include Porter's Five Forces, BCG Growth-Share Matrix, Greiner's Growth Model, Capabilities-driven Strategy (CDS), Business Model Innovation (BMI), Value Chain Analysis (VCA), Endgame Niche Strategies, Value Patterns, Integrated Strategy Model for Value Creation, Scenario Planning, to name a few.

Learn about our Strategy Development Best Practice Frameworks here.

Readers of This Article Are Interested in These Resources


66-slide PowerPoint presentation
Advanced Product Quality Planning (APQP) is a structured method of defining and establishing the steps necessary to assure that a product satisfies the customer. It provides a set of detailed requirements to be undertaken at each stage in the APQP system. APQP is used when a new and/or [read more]


 
21-slide PowerPoint presentation
 
 
306-slide PowerPoint presentation

About David Tang

David Tang is an entrepreneur and management consultant. His current focus is Flevy, the marketplace for business best practices (e.g. frameworks & methodologies, presentation templates, financial models). Prior to Flevy, David worked as a management consultant for 8 years. His consulting experience spans corporate strategy, marketing, operations, change management, and IT; both domestic and international (EMEA + APAC). Industries served include Media & Entertainment, Telecommunications, Consumer Products/Retail, High-Tech, Life Sciences, and Business Services. You can connect with David here on LinkedIn.

, , , , , , , , , , , , ,





Complimentary Business Training Guides


Many companies develop robust strategies, but struggle with operationalizing their strategies into implementable steps. This presentation from flevy introduces 12 powerful business frameworks spanning both Strategy Development and Strategy Execution. [Learn more]

  This 48-page whitepaper, authored by consultancy Envisioning, provides the frameworks, tools, and insights needed to manage serious Change—under the backdrop of the business lifecycle. These lifecycle stages are each marked by distinct attributes, challenges, and behaviors. [Learn more]

We've developed a very comprehensive collection of Strategy & Transformation PowerPoint templates for you to use in your own business presentations, spanning topics from Growth Strategy to Brand Development to Innovation to Customer Experience to Strategic Management. [Learn more]

  We have compiled a collection of 10 Lean Six Sigma templates (Excel) and Operational Excellence guides (PowerPoint) by a multitude of LSS experts. These tools cover topics including 8 Disciplines (8D), 5 Why's, 7 Wastes, Value Stream Mapping (VSM), and DMAIC. [Learn more]
Recent Articles by Corporate Function

  

  

  

  

  


The Flevy Business Blog (https://flevy.com/blog) is a leading source of information on business strategies, business theories, and business stories. Most of our articles are authored by management consultants and industry executives with over 20 years of experience.

Flevy (https://flevy.com) is the marketplace for business best practices, such as management frameworks, presentation templates, and financial models. Our best practice documents are of the same caliber as those produced by top-tier consulting firms (like McKinsey, Bain, Accenture, BCG, and Deloitte) and used by Fortune 100 organizations. Learn more about Flevy here.


Connect with Flevy:

     
  


About Flevy.com   /   Terms   /   Privacy Policy
© . Flevy LLC. All Rights Reserved.