The answer is “yes.” \u00a0Numerous studies have showed that consumer behavior is irrational. \u00a0If you assume otherwise, then you are also behaving irrationally.<\/p>\n
To understand why people aren’t buying your product, it is imperative to understand some key concepts in behavioral economics. \u00a0Here are three important principles to be cognizant of.<\/p>\n
Principle 1. Losses Loom Larger than Gains<\/strong><\/span><\/p>\n Every new product provides perceived gains and losses for the customer. \u00a0 \u00a0These gains and losses need not be financial. \u00a0For example, let’s say you are starting an online grocery store for your municipality. \u00a0With the promise of groceries delivered to the door, the perceived gains could be convenience, time savings, and effort savings. \u00a0On the other hand, you are altering the way the customer performs a certain process–buying groceries. \u00a0This 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.<\/p>\n When we look at this objectively, online groceries is a clear superior choice. \u00a0Convenience, time savings, and effort savings are great value propositions, after all.<\/p>\n However, when the customer evaluates options subjectively, it becomes unclear whether online groceries is the still better choice. \u00a0In fact, it is likely the customer views online grocery shopping as the poorer choice. \u00a0This is because losses loom larger than gains.<\/p>\n A consumer has an inherent Consumer Bias<\/strong>. \u00a0This bias weighs a loss three times that of \u00a0a benefit. \u00a0To 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.<\/p>\n Principle 2. Reference Points Matter<\/strong><\/span><\/p>\n The second principle to understand is different people have different reference points. \u00a0These reference points matter. \u00a0The reference point simply refers to the person’s current state of being.<\/p>\n 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. \u00a0This process may already be part of the customer’s weekly routine. \u00a0Gains and losses are relative to this state of being.<\/p>\n For two people with different reference points, a gain for one person may be perceived as a loss for the other. \u00a0To illustrate this concept, let’s look at the price of gas. \u00a0Assume the average price for a gallon of gas in the US is $3, whereas it’s $10 in the UK. \u00a0If a US customer came upon a gas station charging $6.50\/gallon, she would be furious. \u00a0If a UK customer came upon the same situation, she would be ecstatic. \u00a0(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.)<\/p>\n The Value Function Illustrates Objective vs. Subjective Values<\/p>\n By understanding your customer’s reference point, you can determine her perceived gains and losses. \u00a0In most cases, your reference point is different from that of your customer’s. \u00a0This is because you have already used and experienced your product, whereas your customer has not. \u00a0Your product has become part of your state of being. \u00a0This disparity in judgment is captured in the concept known as the Innovator’s Curse<\/strong>.<\/p>\n Principle 3. Endowment Effect<\/strong><\/p>\n According to the Endowment Effect, people value items in their possession (i.e. part of their endowment) more than items not in their possession. \u00a0This is because people are loss averse.<\/p>\n This behavior sheds some light on why losses loom larger than gains. \u00a0If 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.<\/p>\n Are any of these principles hindering your sales?<\/em><\/strong><\/p>\n Recognizing and understanding these three principles of behavioral economics is crucial. \u00a0It allows us to develop product strategies that specifically counter consumer adoption barriers at play and leverage behavioral tendencies.<\/p>\n Now, let’s look at three such strategies–one for each principle.<\/p>\n The 10X Rule<\/strong><\/span><\/p>\n If losses loom larger than gains, then we need to create a product where the gains greatly dwarf the losses. \u00a0Create one where the benefits are 10X that of the losses, so that all economic and psychological switching costs are overcome. \u00a0This is also known as Andy Grove’s 10X Rule. \u00a0Andy 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.<\/p>\n Of course, this strategy is easier said than done.<\/p>\n Reference Point Pivot<\/strong><\/span><\/p>\n Since reference points dictate how customers perceive gains and losses, it makes sense to seek out customers with favorable reference points. \u00a0Think about it this way. \u00a0In one market, your product may have fulfill the 10X Rule. \u00a0In another, your same product may be perceived as 10X worse!<\/p>\n During its earlier years, Walmart opened stores only in rural areas to compete against local mom and pops. \u00a0Compared with these incumbent retailers, Walmart was a clear 10X improvement. \u00a0If 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.<\/p>\n Ideal markets are ones filled with first time buyers. \u00a0For the first time buyer, her reference point is neutral. \u00a0She doesn’t have any preconceived biases over existing benefits lost and new costs incurred, because she doesn’t currently use the\u00a0incumbent\u00a0solution. \u00a0Thus, for many products, it is easiest to launch in emerging markets. \u00a0This is because emerging markets (e.g. BRICS nations) are filled with first time buyers. \u00a0Read more about entering emerging markets here<\/a>.<\/p>\n Freemium Model<\/strong><\/span><\/p>\n The Endowment Effect has an interesting implication. \u00a0It 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.<\/p>\n With this insight into consumer psychology, many companies offer free samples to get customers hooked on their products. \u00a0Once the customer begins using the product, she will appreciate the benefits it offers and is likely to spend money to retain these benefits. \u00a0This is, in essence, an example of Reference Point Pivot.<\/p>\n Similarly, a popular business model adopted by many Internet SaaS companies is the “freemium” model. \u00a0In the freemium model, the customer is first presented with a free version of the product. \u00a0Then, the customer is offered (or forced) to a premium version.<\/p>\n 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<\/a>.<\/p>\n Still no dice?<\/em><\/strong><\/p>\n Of course, if your product is awesome–you think so and your customers agree–then lack of sales could be due to poor marketing. \u00a0Ramp up your marketing, sales, and biz dev efforts.<\/p>\n EDIT: I have just published a new article, The Complete Guide to Product Adoption<\/a>. \u00a0This 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.<\/p>\n Please also share your thoughts, experiences, and advice in the comments. \u00a0Thanks!<\/p>\n","protected":false},"excerpt":{"rendered":" It’s a common business problem faced by any size company, big and small. The situation is you’ve developed a brilliant product. \u00a0Compared 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. \u00a0Why aren’t… Why People Won’t Buy Your Product Even Though It’s Awesome<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":391,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"","neve_meta_content_width":0,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","footnotes":""},"categories":[81],"tags":[149,150,139,142,146,148,152,151,147,143,141,140,144,145],"class_list":["post-376","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-strategy","tag-10x-rule","tag-andy-grove","tag-behavioral-economics","tag-consumer-adoption","tag-consumer-bias","tag-endowment-effect","tag-freemium","tag-freemium-model","tag-innovators-curse","tag-product-adoption","tag-product-launch-strategy","tag-product-strategy","tag-prospect-theory","tag-value-curve"],"_links":{"self":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/376","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/comments?post=376"}],"version-history":[{"count":25,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/376\/revisions"}],"predecessor-version":[{"id":1419,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/376\/revisions\/1419"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media\/391"}],"wp:attachment":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media?parent=376"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/categories?post=376"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/tags?post=376"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"Prospect](\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2013\/05\/prospect_theory.gif\")
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