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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.]]>

Why a Strong Brand Means Higher Growth and Better Valuation for your Startup

Beyond having an amazing product, nimble engineering, and a great team of people, marketing excellence is the next big differentiation factor that startups should focus on. And within marketing, a smart brand strategy is one of the biggest levers available. Ignore it at your own peril.

Sadly, the typical marketing books that we are still relying upon were mostly written during the era of large company marketing, and focused on established brands. If you already have a market position, own some market share, and are releasing one product after another, the kind of marketing you need is very different than when you’re a startup with nothing to begin with. Marketing an existing brand is very different from building and growing a new one. And if you hire a marketer who has always worked with established brands, their experience will not include what it takes to create a new brand.

In part, the recent explosion in “digital marketing” has overshadowed our activities and understanding of marketing practices. In reality, marketing has 2 sides: a quantitative/measurable one, and a non-quantitative one that appeals more to the mind, perceptions, expectations, experiences, feelings and emotions of the market. This non-tangible side of marketing is the most difficult to understand by a startup CEO who is typically either an engineer or a product-focused founder who has never experienced, witnessed, nor worked with great marketers and understood the how, what and why of marketing. That non-quantitative side is also harder to measure, and rather is the impetus to a trickle down effect with results that become visible much later.

Overall, startup marketing is different. In the same way that your product evolved from being an embryo (starting as a Minimum Viable Product), to a more mature version, marketing also needs to evolve and grow with your startup evolution.

Marketing’s Role Changes Based on Your Stage

We could break-up marketing’s role into three different phases of evolution, each with various needs and activities according to the following table:

Startup Stage

Need

Key Activity

Marketing’s Role

Early

MVP Iterations Hacking growth

Looking for Product/Market Fit

Value Proposition

Growth

Quantifying and systemizing growth

Expansion via Repeatability

Messaging Differentiation

Scaling

Market Leadership

Brand Awareness

Brand Strategy

Most startups figure out what they need to do in the early and growth stages, and that type of marketing is very focused, specific and rather quantifiable. But things get more tricky and difficult in the later scaling stages when you need to let marketing become an effective weapon that differentiates you in the market. In the scaling stage, working on your brand becomes a key aspect that needs to be developed proactively. And it starts with a strategic brand assessment and positioning development exercise, with the goal of developing a comprehensive brand messaging architecture that can be deployed in the marketplace.

Enter Brand Strategy Development

Brand strategy is a soul searching type of work that you do in order to find your unique brand position as it should be amplified into the market. Few people do brand strategy well, as it takes a trained eye to pick out the needed insights, and it is typically done from the outside, by a brand strategy or marketing professional expert.

A common pitfall some startups fall into is to hire a brand agency who will sell their “branding capabilities”, but these types of projects typically fall short of providing anything of strategic value, as they will gravitate around the brand visual identity, which is one the last tactical steps of brand strategy. Here’s an example of what a brand agency sees in terms of “brand strategy”, and you must avoid this type of work because of its low value: 7 Components of a Powerful Brand Strategy.

A brand is a lot more than a stylized name, color, sound or logo.

Another mistake is to assume that the internal marketing department can figure this out. Unless you have a marketing CMO or VP who has had experience with real brand strategy, you will fall short, and undoubtedly land in the realm of the first pitfall category. A third type of mistake is to fumble your way via A/B testing of marketing slogans on the website landing page, and take that as an accurate brand messaging test.

But you can’t short circuit a proper brand strategy development.

When you start developing the brand strategy, you need to interview several customers, prospects, and partners; conduct a competitive assessment, a market assessment, a review of what analysts or experts are saying about you; and then you can start to develop some hypotheses to determine your key differentiators. You need to extract your single most powerful differentiator, the one idea that you should be identified with,- that one promise that you must make and keep to build your business.

Marketing is telling your message very clearly and simply to a segment of the market who has never heard about you, with the goal of making them want to interact with you (by buying your product/service or using it). You don’t just market to your existing customers or users with the hope they will relay their enthusiasm and advocacy to their peers. You need to do more than that.

A brand architecture includes the following elements:

  • Brand Attributes (a series of qualities and strengths your brand possesses)
  • Brand Position (and its key statement)
  • Brand Messages (customized by audience segment)
  • Brand Communications (via customer touchpoints, living it internally and physical environment/sensory)
  • Brand Visual Identity and Standards (the design, styles, and guidelines that will govern the visualization of your brand)

If you have a strong brand, the perception and the reality are close to each other, because your promise and your delivery are total in sync.

Branding is how you transcend and project your values into the customer mind, and the memories you leave them with, each time they use your product. It could have little to do with the product features, but rather everything to do with how the customer feels after they interact with your product.

Branding is how your prospects think about you before they experience your product.

Simplicity and clarity are part of a strong brand messaging. The message must be easy to understand. There is a genius behind crafting a memorable message that sticks in the mind of your prospect, as a smart position that matches what you are really about.

Starbucks’s promise is not great coffee, but rather comfort in a place that’s not your office and not your home.

Here’s how Brunello Cucinelli, the CEO/founder of the company sporting his name, a world leader in the cashmere products, explains his brand in an interview reported by Om Malik. It is a case where he clearly associates his company’s purpose- “dignity” with his brand. For Brunello Cucinelli, his brand is that catalyst that unites the inside of his company to the outside market that consumes his products. “I wanted the brand to have my face. I wanted the product to convey the culture, life, lifestyle, dignity of work. I wanted a profit with dignity. Because the press all talk about the moral ethics of profit. Why can’t we have a dignified profit then?”

Better Growth and Higher Valuations

A strong brand has two key beneficial aspects: growth and valuation.

A strong brand creates pull in the marketplace, because it lets your mindshare be larger than your actual marketshare. When a large number of business prospects know about you, you render your sales people’s job easier because the prospects they encounter will have heard about you and already have a favorable opinion of you. That way, the salesperson can focus on their job without an uphill battle, or time spent trying to explain who you are. And in consumer markets, a larger mindshare means more users will eventually decide to try your product.

Startups that don’t focus pro-actively on building their brand are making it harder on themselves to command a higher valuation in the venture or capital markets. As much as users and engagement contributed to your early valuation, brand and its strength are an amplifier of your market value. It is like a premium that the market or investors bestow on you, as a reward for having penetrated their minds and the market at large.

Grow your brand in order to grow your startup.

Treat the Competition Differently, Depending on Your Stage

All strategy depends on competition. – Bruce D. Henderson, founder of the Boston Consulting Group fish competitionThe topic of competition for startups has recently come back via two posts;  Competition from venture capitalist Rob Go, and Why I Don’t Stress Over Competition Anymore, by entrepreneur Alex Turnbull of Groove. Each post tackled a different aspect of dealing with the competition. Alex suggested not worrying about the competition, but dealing with it, and Rob likes to see startups that adopt a balanced view of the competition. To round up this topic, there’s also Fred Wilson’s 2011 post Competition – The Pros and Cons. My viewpoint is: you need to treat the competition differently depending on the stage of startup evolution you’re in.

1. Idea stage

At the idea stage, you’ve decided that you will either disrupt incumbents via a new way of doing things (your product), or you will enter an emerging market that will grow with you, and where you hope to either dominate that market, or carve yourself a big enough share in it. At this point, you may or may not be able to draw a competitive matrix (or petal diagram), and if you do, it may or may not be accurate. What is important is that a) you know how different you will be from the existing players or (future) competitors, b) what position you want to occupy in the new landscape that you see, and c) how you’ll get there, something that has nothing to do with the competition itself. The underdog in many products…can pick and choose where it wants to hit the giant; the giant, by contrast, must defend itself everywhere. — George H. Lesch, ex-president of Colgate-Palmolive Company

2. MVP

At the MVP stage, you still don’t know who your competition really is. Who you may think the competition is, may not the competition, because you’re still iterating your product, and bumping into different types of users or customers. I would argue that during the MVP stage, your competition is actually the time you put into customer development and getting your minimum viable traction in higher gear. MVPs are unique beasts. That’s why defining a competitor against an emerging product or market might be a difficult thing. You are competing against is the mind share of clients/users more than against a particular company or product. Competition brings out the best in products and the worst in people. – David Sarnoff, founder & president of RCA

3. Product/Market Fit

At this stage, the competition starts to get more clearly defined because your trajectory is more stable, so you start to see some patterns emerge. But it’s also possible that some companies who were competitors bifurcate into diverging paths. For e.g., about 3 years ago, Box and DropBox were much closer competitors than they are today. Box bifurcated towards collaboration over documents, whereas DropBox continued to focus on documents storage and transmissions.

4. Growth

You really start to grow once the market has started to define itself, and you happen to hit that magical timing window. At this stage, market education is important, so having a handful of competitors that help making the pie bigger is a good thing. But the key is to grow faster than the rest of the players in your market. This is when leaders emerge, and others get left behind. Some companies like to grow fast while being under the radar, then they suddenly emerge as a leader by showing some great numbers that validate their leadership. That’s a good strategy, if it applies to you. The growth phase is often won via superior marketing and growth hacking over the competition. Most of our competitors were manufacturing-oriented, generations of fine pickle makers and proud of it. We came in exactly the opposite, as marketers who manufactured [in order] to have something to sell. – Robert J. Vlasic, president of Vlasic Foods

5. Scaling

If you are lucky enough to have made it through the scaling stage, at this point you have a new option for dealing with the competition: you can acquire them. Facebook acquired FriendFeed early because they were encroaching on the Facebook friend’s news feed strategy. Facebook later acquired Instagram because they saw it as a mobile on-ramp into Facebook. Recently, Facebook wanted to acquire Snapchat because their users were going there, at the expense of spending less time on Facebook. Here are additional thoughts on how to weaken the competition and strengthen your position:
  • If you’re in a B2B market, know exactly how to sell against your competition. Have a matrix with specifics such as “against competitor X, lead with feature Y; for competitor Z, focus on these 2 options, etc.” The better you know your competition, the more you’re able to attack their weaknesses, while emphasizing your strengths.
  • If you’re competing in a consumer market, keep evolving your product. Kill it with features that increase user engagement. High user engagement builds a fortress against your competition, because users won’t have time to go elsewhere.
  • Articulate your value proposition really well so that the rolling ball effect of your product on the market keeps getting bigger. The clearer your message is to the market, the more “pull” you will have, and a higher share of mind.
  • Keep growing faster than the competition. If an early market is characterized by a lot of competitors with equal strengths, when a player distances itself from the pack, it becomes the leader. Growing sales or users is a great way to beat the competition.
  • Differentiate strategy from tactics. Think competitive strategy in order to leap frog the competition and out think them, but compete on the ground with strong tactical blocking and tackling.
  • With B2B customers, when you have lots of sales activity, start doing win/loss analysis reports that outline exactly why you are winning or losing in the market. Collective learning will make your sales team stronger.
Finally, while seeing a lot of competitors is ok early in the game, having too many players later can commoditize and balkanize the market to the point that it could hurt all players. That’s why sometimes VCs recognize that, and they fund a given startup in order to allow it to grow more than their competition. 3 is the perfect number of market players in well defined markets; maybe 5 maximum. Beyond that, it gets messy.
Keep your friends close, but your enemies closer. — Sun Tzu
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Software Engineering, Business Models, Culture, Management, Metrics, Analytics, Entrepreneurship, Growth, Marketing, Weekend Roundup#14 Oct 13 2013

Startup Management is a manual selection from the hundreds of weekly articles being curated. Previous issues are available here. There are 32 links in this mega edition. I couldn’t narrow it further. Too much good content! Have you been forwarding to friend, so they can sign-up and benefit too? You can help, by forwarding to 5 friends.

Objectives, SaaS, Sales, Venture Capital, Conversions, Monetization, Growth, SEO, Mentorship, HR, Weekend Roundup #13 Oct 6 2013

Startup Management is a manual selection from the hundreds of weekly articles being curated. Previous issues are available here. There are 13 links in this edition. Forward to a friend, so they can sign-up and benefit too. Business Models To monetize large networks of engaged users with a free product, founders need to create a new product that is different from the free one, leading-up to a Monetization Dilemma they will face. That dilemma emerges when the founder doesn’t get as excited or involved as they were with the original consumer product. I list 8 points for managing this dilemma. Conversions Bill Gurley revisits “the most powerful Internet metric of all”, 13 years after he first wrote about it, in Conversion: The Most Important Internet Metric of All (Revisited). “Conversion improvements typically are the aggregate gain of 100 tiny improvements, not one silver bullet. Rarely will you find one single change that is going to have a 5% lift in conversion… rather you will find 30 things on a page that all have a tiny impact.” This is a must read.

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