• by William Mougayar
    Venture advisor, 4x entrepreneur, marketer & strategist. I live in Toronto, curate a lot, blog a bit, and help startups.

Maximizing User Adoption by Understanding Behavioral Economics for Startups

gains-lossI recently attended a seminar on high stakes negotiations run by Kellogg School of Management Professor Victoria Medvec, and this sentence profoundly resonated with me:

“People tend to be risk seeking in the domain of losses and risk-averse in the domain of gains”.

There is a lot of meaning in that sentence, because of its precise applicability to the world of startups.

As it turned out, the origin of this statement lies within the Prospect Theory that was first developed by Daniel Kahneman (who later won a Nobel Prize in Economics for this specific work), and Amos Tversky in their 1979 seminal paper, “Prospect Theory: An Analysis of Decision under Risk”.

Prospect theory is a behavioral economic theory that describes the way people choose between alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using simple rules (that may not be perfect). At the heart of this theory, the concept of “loss aversion” is important, as it refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Most studies suggest that losses are twice as powerful, psychologically, as gains, as a factor for moving people from their status quo.

The way this relates to startups with a new product is staggering, because success really depends on user adoption, and there are always risks involved when startups introduce their products to the market, as seen from a user perspective.

Most startups have figured out how to develop innovative products, but when some of them fail, it’s likely in the “go to market” approaches they choose, i.e how they attempt to get users interested in trying their products, or in switching from some other products or habits they are currently with.

Common startup mistakes include thinking that users and customers will move to your product because it is better, newer, faster, smarter or cheaper than what they are currently using. The thinking goes like this, and I’ve heard this numerous times in pitches or discussions: “they (prospect) are already using this (inferior) system, or are set with this (unproductive) habit, so if we show them how our product can improve what they are doing, it is a no-brainer for them to switch or start using our product.”

Wrong thinking.

What these assumptions have failed to realize is that these prospects are risk-averse, i.e. their default position is to not change what they are doing, because you are talking to them about some (theoretical or potential) gain which they only see as being a marginal reward when compared to the efforts and pains it would take them to move from their current situation.

However, if you went after a segment of prospects that currently doesn’t have a solution, or isn’t using something, or is currently incurring losses, they will be more inclined to try your product, because they are already suffering, or being disadvantaged. So, they are the risk-seekers, and they will be more open to trying something new.

This applies to consumer (B2C) and enterprise-related products (SaaS/B2B) equally well. It even applies more for blockchain-based solutions who are assaulting the existing banking systems with promises of “better, faster, trustless, intermediary-less” options. That’s why some of the trials and proofs of concepts that are being incubated in new areas have a better chance of succeeding initially because you’re not moving people from existing systems (risk-aversion), and rather showing them something new that didn’t exist before (risk-seeking).

In a nutshell, risk averse prospects will push-back on your pitches, whereas it’s easier to pull risk seeking prospects to try your products.

Of course, if you spend enough energy and analysis on justifying change to risk averse prospects, by using proposals based on ROI, profit improvement or cost reduction, you could move them to change, but a significant amount of time will be spent doing that, and that’s a killer for startups who need to show some quick adoption gains first.

Another common mistake by startups is when they are seemingly successful with an initial group of users, also known as “early adopters”, but then, they hit a wall, and can’t grow past it. That’s because these early adopters were risk seekers, but more importantly they were actually advanced users with unique problems that the rest of the market didn’t have, i.e. the market was risk averse. So, as a startup, you want to ask yourself whether your early adopters are really the tip of a big market, or if they are a patch of their own.

Putting Prospect Theory into Practice

So, how do you apply this, if you are a startup?

Break-up the different parts of your product according to the various features they provide, and label each usage case as either going after a risk aversion or risk seeking behavior. Ask yourself: is this feature or capability in the domain of risk aversion or risk seeking? For example, your product might allow users to search for something unique, and users will try it but when you ask them to do more with it, there might be risk aversion to it, and user adoption will stall. So, a lesson here is to make the key behavior you want as appealing as possible to risk-seeking users. Don’t hide it beneath other usages, because your spikes in adoption will be followed by rapid drop-offs in further engagements by risk aversive barriers.

On your website and sales communications, highlight loss words, such as competitive threat, exposure, risk, vulnerability, missing out, when you want to move your prospects off the status quo. Remind them of what they are “missing out” on, versus what they could be gaining.

In summary, anyone with a new product/service faces the challenge of user adoption from the minute they have something available to show the market. Numerous theories and best practices exist to guide you through the various tactics and strategies for getting users to adopt your product, but understanding prospect theory is critical in figuring out the initial target segments to go after, so you don’t spin your wheels with the wrong ones.

As a startup, I urge you to memorize this sentence and understand its meaning:

Prospects are risk seeking in the domain of losses, and risk-averse in the domain of gains.

Find your risk seeking segments of users (and there could be several of them), and you will get easier adoptions for your product.

  • OK – this really has my attention William …

    We have never looked at our B2B in this context, but our targets are very large incumbents in a marketplace that is significantly threatened / enhanced by new technology.

    In the past we noticed targets with services in place that are complementary (for cross-sales to our product)
    are surprising less excited than those without. (The targets with a bigger upside are less excited)
    This is a surprising pattern.

    We had considered it could be a failure to differentiate (that they think they have what we offer) – but this did not make sense.

    Now applying your thinking (or that of your discussion):

    Companies that have not responded know they are in trouble – since our approach is very easy to adopt – from a FOMO perspective we offer a “get out of jail free” card.
    On the other hand those who have responded are significantly “ahead of the game” – and are very busy bedding down new business models

    Suddenly this makes sense – the predominant decision is not about doing the right thing – it is about avoiding a train smash.
    Naturally there is a subsidiary consideration which we can exploit, but perhaps we should be focussing our services where they are “least valuable”

    Note : for those that are interested – We use smart meter data to identify previously unexposed energy saving opportunity at scale:
    According to this hypothesis…
    The risk seekers are energy retailers without any energy services offerings – they are in a deep commodity trap, since we can offer some added value that clearly differentiates their commodity offering we are of interest.
    The risk avoiders are those selling energy performance contracts, cross-selling new plant, providing facility management services or consultancy – they are (quantitively) our “ideal” collaborators because we can help them massively leverage and better target these services – but they are ahead of the curve and “doing ok” so (at least in the short term) they are less excited by us.

    PS : In developing my comment it seems over time this strategy evolves, allowing us to rephrase the “start up” question :

    Are you most valuable to those you can help who live on the trailing edge, rather than delivering more value to those at the bleeding edge ?

    • Thanks James.
      I would be curious to learn about your success focusing on risk-seekers vs. risk-averse prospects. Or maybe analyzing your previous efforts and compare to this theory.

      • Ok – William – I’m up for the challenge

        So this needs some structure – lets have an initial superficial go at it (might trigger some more formal work off-line later)

        First off (in our world) there is a big difference between written materials and face-to-face negotiation. Often something in writing needs to be “acceptable” throughout an organisation for example relating to apparent motive or justification. However, often the human motivation of the decision maker that may have to post-justify rests on very different (often unspoken but potentially valid) tenets. So for example we often supply to individual contacts that really trust us, but are aware they cannot rest on their ” gut feel ” as due diligence in reporting back – these are the seekers of case studies and collateral (who know that case studies at the bleeding edge are hard to come by and often not public domain).

        In effect this means (especially at a time of change) that the innovative risk-seeker may not want to be seen as such. On the flip side the traditional risk avoider may want to be seen as highly progressive. So we would expect mixed signals from clients.

        Ideally a ideal product or service provider must “tick both boxes”, perhaps with different emphasis depending on use case. With regards some data I think there is scope to test this (in the short term as a thought experiment only).

        At European Utility Week in Vienna an informal survey of participants conducted by the organisers said ‘energy services ‘ (cross-sales based deepened relationships than simple legacy commodity relationships) are becoming an essential defensive strategy to players in energy retail markets – leading to technology FOMO (in competitive markets) [happily we anticipated this a few years back].

        If so this means that “late adopters” should become radicalised as risk seekers. Meanwhile the bleeding edges continue to get their fingers burned buying unproven technologies. Think solar a few years back. Both correct towards the edge of innovation – but need different messages to be comfortable.

        Traditional utility retailers (local Gas and Power companies) face deregulation (in some markets) and increasingly peer-to-peer generation / trading / distribution is driven by volatile localised renewable production.

        This ‘breaks’ the legacy stronghold of hierarchical power distribution grid capacity – A huge global change is happening.

        This brings about a nightmare “hotchpotch” of legislative/trading environments especially in international trade contexts and on boundaries. And a jargon that is impenetrable to all but a few experts. Necessity being the mother of invention there are some very interesting plays emerging about ‘virtualising power stations’ to arbitrage market price inefficiencies through coupling flexible use to volatile power production. The exploding electric car market is an example – it causes huge demand spike in some Scandinavian cities (everyone gets home and plugs in). So some companies are looking to virtualize and trade car aggregations to take future trading positions in markets. Essentially cars become a virtual link in the power grid. So what does this mean to fleet operators, gas stations, grid operators, car manufacturers, railways, logistics companies? – in short – rapid change, and fast change is hard to follow.

        Generally energy retail is facing margin pressures from many side (generation, distribution, new entrants, low commodity prices and extreme decreases in churn / switching friction). It is not news that Russian / Ukrainian, Baltic , or Middle Eastern supply routes into Europe are politically deadly !

        So rapid decentralisation of market models (hence my previous private exchange with you about blockchain models) is seen as (not a panacea but) a necessary play needed to strengthen local distribution paths, and moderate uncontrollable price volatility (when the wind blows or sun shines), balance supply and demand etc. As transaction rates increase in ever smaller quantum trades (eg people buy tiny amounts of energy on spot markets), legacy settlement systems break – (Can even the block chain keep up ?)

        And … la plus ca change – There will be winners and losers.

        Current losers are bigger very conservative organisations, but influential individuals in them are smart enough to see they can use FOMO arguments as an existential threat, they can leverage their innovative “risk seeking behaviour” but spin it as precautionary (ie a change or die argument).

        Unusually this means we get better access to bigger companies who want change (and can) – and our data seems to confirm this.

        Relatively smaller companies (traditionally a bit more agile) have been playing cost reduction games (traditional conservative commodity battles) and have their eyes off these massive threats on the horizon. If these smaller companies are “sticking to their knitting” to avoid the cost overheads of R&D or innovation. So we would find it much harder to engage with smaller companies (and again this is the case for us)

        Prediction – smaller less innovative local utility companies many will be priced against the wall in competitive markets and when weakened sufficiently (facing diseconomies of contraction) will be acquired for their client bases only.

        We are seeing signs/ hearing discussions of very significant M&A activity (which fits the analysis).

        What does this all mean to your hypothesis – Seen through the filter of existential threat a nominally very conservative organisation can exhibit early adopter positions.

        Meanwhile others merely pretend to innovate by acquiring related company functions that are so established that the’one stop shop’ is actually a bunch of distinct silo’ed operations within the same group trading company. they fail to benefit from economy of scale, cross sales, deeper client relationships etc.

        Our client data sample is small (a tiny number of vast companies) – but so far the hypothesis you suggest seems to have merit and fit the facts.

        What I would note is that most startups must see this as not either or – but as a good segmentation to determine where to put effort – the messaging perhaps can fit the perceived pain point in either case.

        If you are right – perhaps we should continue to befriend the 600lb gorillas we already love, and not worry so much about the “they should be interested” bigger market (as they may be destined to be scooped up at low price in future anyway).

        As such I see this as a part formalisation of instinctive positioning we are taking

        Fun speculating – and we’ll see how it goes !

        Again thanks for the stimuli !

  • Douglas Crets

    This was great to read. I benefited most from your point at the end about “how.” The loss aversion and the risk doesn’t bother me at all, but it helps to explain why my consumers may factor risk, gain and lost different than I am factoring it. Your points reminded me of what we used to tell our sales teams in the conference business. It works to highlight loss or gain with customers you already know, but there has to be a reason that people don’t ‘hire’ the product when you don’t know them. People are more readily able to reach for something new when you show them how their hiring of the product helps them succeed, which, in my mind, is not an issue of risk or gain, but of transformation.

    • Yes, but it takes time to sell transformation, no?

      • Douglas Crets

        Nothing wrong with that.

        • Except that it takes more time and money to sell to risk averse customers than to risk seeking ones.
          All I’m advocating is to start with the risk seeking ones.

  • Scott D. Witt

    Thanks for highlighting this important topic!

    Two classic books provide valuable guidance in this area: Crossing the Chasm by Geoff Moore, and SPIN Selling by Neil Rackham.

    > ‘Crossing the Chasm’ addresses the problem of driving adoption beyond early adopters into the mainstream market. The ‘Chasm’ is the enormous difference in the buying requirements of early adopters and mainstream customers.

    Early Adopters (just a fraction of the overall market) seek out new Products that will give them massive competitive advantages. They can tolerate the political and economic risks that come with new products from unproven companies.

    Mainstream customers are primarily concerned with just keeping up, and they avoid the risks of an unproven Company. So they wait on the sidelines until the ‘market’ chooses a winner (the firm that offers that best ‘whole product’ of supporting resources). If a winner is chosen, the mainstream ‘herd’ moves forward and embraces the winner en masse, resulting in massive sales. (The saying “no competitors, no market” reflects this: without sufficient competition, a market winner may not emerge, and the mainstream never buys.)

    Startups get into trouble when they see a sales bump from the early adopters, and then extrapolate this rate onto the much larger mainstream market. But once the early adopters have all made their purchases, the sales volume drops back to zero, and stays there.

    Moore argues that to cross-the-chasm, a business must fundamentally change its approach, from a narrow product-focus, to broad a company-focus with a ‘whole product’ that mainstream customers expect. This is insight is especially relevant to the thousands of startups (and investors) who “just focus on building a great product” and never build the business that mainstream customers demand.

    > ‘SPIN Selling’ is a research-based sales process that addresses the problem of selling big ticket products to risk-averse decision makers.

    In general, decision-makers overestimate the risks/costs of switching to a new product/company, and underestimate the number, and cost, of the problems that they actually face as well as the value of solving these problems. (In other words, you’re also competing with the status quo)

    A major component of the SPIN Process (Situation / Problems / Implications / Needs-Payoffs ) is helping decision-makers to see the risks and rewards of your product/company in a more balanced way.

    One size fits none, and no framework or process is appropriate for every situation. But these books should be part of every tech entrepreneur’s education and practice.

    • Great comment. Thanks Scott. I will check out SPIN.

      This was prescribed as a tactical (and practical) approach to gaining initial customers.

  • awaldstein

    Really interesting William and challenging ideas.

    But I’ll take the other side as I don’t see the market moving on these levers.

    If I apply your phrasing:

    “On your website and sales communications, highlight loss words, such as competitive threat, exposure, risk, vulnerability,
    missing out, when you want to move your prospects off the status quo. Remind them of what they are “missing out” on, versus what they could be

    These are not the motivations of individuals in a mass market.

    Not the motivation for either side of the Air BnB equation.

    Not the motivation for the consumer side of Uber nor the consumer drive towards community and choice in the massive wellness market.

    I like this idea and it challenges me.

    I think the real answer lies in understanding the behavior of groups and communities and human behavior within those structures. You can apply your theory to that but it misses it I think.

    Thanks for this. An early morning thought challenge.

    And very well written.

    • Douglas Crets

      I agree. I think these levers are more the kinds of levers that trigger finance people to behave. I think the levers consumers pull are more like emotional and transformative levers, and you don’t know or understand those until you get into a behavior creation experience with consumers. Very Regis McKenna and Clay Christensen kind of stuff.

      • awaldstein

        Consumer behavior is the trigger to everything.

        This post does a decent job of expressing how I think the market has changed, why many of my earlier heroes like Geoff Moore are simply stuck in a preweb thinking paradigm that has evolved and the behaviors of people along with it.

        Community as the marketplace http://awe.sm/qApg8

        • I agree that crossing the chasm needs a calibration against our current web/connected realities.

          • awaldstein

            I believe that more than ever if you start with the idea that the community and market are one and the same, it drives you in the right direction.

            And no disrespect to Geoff who I hired 3 years running to keynote a series of conferences when I worked with Umang Gupta at KEYN.

    • Thanks, but my thoughts were about applying this towards the initial early adopters segment primarily.

      Those that have nothing to lose are more likely to try your product, before those that need to consider switching costs and time.

      • awaldstein

        Behavior is behavior.

        This is like saying that selling a product that saves the user money is as powerful as selling them something that makes money.

        In abstract yes, in reality the impulse of buying is not wired that way as I’ve observed it.

        I think honestly that creating a behavioral paradigm that segments early and late users is ultimately a limiting approach. Early users especially are a group. The growth of the base is a community dynamic that is less I think about nothing to loose and more about belonging. True for small and very large groups as well.

        Great stuff btw.

        • Yup, I did mention the linkage from early adopters to the larger segment.
          I think this sentence, in hindsight is very true:
          “Most studies suggest that losses are twice as powerful, psychologically, as gains, as a factor for moving people from their status quo.”
          It’s like fixing the leaky faucet before replacing the one with a scratch on it :)

  • Good article. The fundamental challenge of B2B SaaS is that customer will need to change to adopt your product. I know from experience that every business finds change hard and most change projects fail. This cost and risk is often hidden from a startup. Good to see sound economic theory which underpins practical experience.

    • So, this theory explains why B2B SaaS users routinely try out products on their own without asking IT or higher authorities.
      They will take the risk because they are seeking to revert their losses or fix something that’s nagging them.

  • This is a good read. As a marketer, it is so easy to embrace “better, faster, cheaper” because, after all, innovation is so attractive. Given that change is a challenge for individuals and companies, I can see how reducing pain/risk can be more compelling than embracing a product that offers tiny improvements over the status quo.