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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.]]>

Forget Market Size, Think Problem Size

shutterstock_244363810When thinking about how viable startups begin their lives, maybe we should forget market size, and think problem size.

The old cliche that you should look for the size of a given market is an obvious one, but I think the “size of the problem” might be a more important precursor signal to market size.

So, the key question becomes: Is the problem you are tackling big enough? (instead of: Is the market large enough?)

The reality is that few markets really start by being big when they are initially discovered. They start small, or they are created.

Thinking big from the outset is good, but that is no guarantee for ending-up with a big market. If the problem is big enough, or if it grows to become large, it will lead you to a large market.

So, do you find a problem in a small market that can grow big? Or do you find a large market and change the nature of the problem?

Sometimes, you’re going into an established large market, and in that case, you are trying to displace existing players, but you are typically doing the disruption with a new type of product (perhaps based on a different need you see). So, you enter that market differently than existing players previously did, and while you face initial uncertainty about your success, once you wedge yourself into it, the market opens up suddenly.

UBER wedged itself into a weakness in the taxi dispatch system- ease of scheduling a taxi from a smartphone, and allowing any decent person to drive a car. Then, they wrapped the whole thing with a layer of trust and ease-of-use. For UBER, the problem they initially set to solve turned out to be a much larger problem that was disguised with layers of regulations and monopoly practices. In fact, their solution is now a standard and makes anyone else’s look like they have a difficult problem themselves.

Or, you just create the problem yourself, and provide a solution to it.

Facebook started by exploiting our human need for connecting with friends and being the recipient of what they felt like sharing. Then, they created the “newsfeed” to keep us occupied with a stream of photos, news and comments. By creating the feed, they also created the market for advertising on the feed, and by coupling the knowledge they have about who we are and what we like, they offered a pretty good product to advertisers. Now Facebook owns the solution to the big problem that advertisers face, which is to be coupled with the right audience, at the lowest possible price, and the highest returns on their budget.

Sometimes, you solve a known problem with a new solution.

Since the early web, search was a problem, and it was actually somewhat manageable via a directory approach (Yahoo’s initial foray in search). But web search became increasingly unmanageable until Google came up with PageRank, a way to sort the mess behind the information being published, and another way to find your way inside that mess (search results), and a third way for advertisers to wrap themselves around the search results. Google knew about the problem, analyzed it, solved it partially, and exploited its remaining weaknesses.

Other times, you solve an unknown problem, and it opens a new market.

Airbnb exploited a need we didn’t know could be addressed. We didn’t know we could earn extra income from unused home spaces so easily. But Airbnb understood the problem well enough, that they were able to provide a credible solution for it.

The need and the problem are two different things. There may be no need for something, but you can create a “wanting effect”. How come we didn’t feel the urgent need to post pictures about ourselves 5 years ago, and now it’s an accepted trend (Instagram and selfies in general). Snapchat suddenly catered to young users’ preference for ephemeral media.

Also, you could solve a big technical problem, and that can lead to a new market too.

Satoshi Nakamoto, the “father” of Bitcoin solved the Byzantine Generals double-spend problem, and that unlocked the whole Bitcoin market in a big way.

You know the old saying- “a solution looking for a problem”, i.e. when the problem you’re supposed to solve isn’t so obvious? If you’re being asked that question, you need to rather think if a “problem is looking to be better understood”.

A deep understanding of a problem can lead to insights which allow you to develop a better and more elegant solution than what already exists. And there is great defensibility in that.

  • Find a problem. Big or small. Small is easier, as you wedge yourself in it.
  • Dig deep.
  • Understand the problem.
  • Find all its components.
  • Amplify your understanding of the problem. Solve its many parts, and exploit its remaining weaknesses with your own solution.
  • Suddenly, you will be known to own that problem, and own the market with it.
  • People talk about the pain of the problem. But the pain isn’t always obvious until users start to feel it, or until it becomes visible. By that time, it may be too late (or expensive) to exploit it.

You can either create a new problem, and then exploit it by creating a native solution for it, or you can find a small problem, and make it bigger by serving it well.

Problems and markets are like wells. Sometimes they are dry, and sometimes they are flush with water for years to come. But you will never know until you dig deep enough to find the water tables underground.


Get Out of Your Building Again, Part II

Pic-MarketsSteve Blank popularized the concept of getting out of your building to conduct customer development in the pursuit for the ultimate product/market fit. The benefits were obvious: get to know your real market, test your hypotheses, and gather insights from your customers.

But there is a Part II to this advice. Fast forward to having been successful, nailing the product/market fit, and growing like crazy. Now you need to get out of your building again, but this time, it’s for marketing outreach activities and to establish your physical presence where your customers and markets are.

There comes a point when online referrals, peer to peer viral growth, and centralized command and control online processes can take you so far in terms of reaching maximum visibility, awareness and preference potential to attract new users and customers.

Not all products are conducive to an infinite network-effect-driven growth curve via user-to-prospect referrals, and lateral message propagation.

So, if you’ve reached close to 100 employees, and you think you’re doing well, but 95% of your employees are still in head office, it’s time to re-consider that. If you are the CEO, get out of your building and start reaching your community on the ground, wherever they are. You can’t just push a button from central headquarters and expect local markets to be favorable to you by remote control. Even better, start hiring people in the local markets where your customers and prospects are.

Even Twitter has been opening regional offices, as they need to have feet on the ground where the (paying) customers are. Dropbox and Mailchimp regularly sponsor local activities where their customers and prospects hang out. The reason why Drew Houston hits the speaking circuit so often is because he’s spreading the Dropbox brand around. Facebook knew that a long time ago. They had been cozying-up to the local developers around the world since 1999 when Facebook Connect came out, because they knew that they would in turn evangelize early on in their local markets. Local Facebook Connect meetups were routinely attended by hundreds of developers and marketing agencies.

The battleground for market share consists of reaching your prospects, i.e. the majority of the market who doesn’t know about you. You need to get into their heads before the competition does.

Most startups are comfortable dealing with their customers, but they struggle reaching the outer layers of the market they really need to attract. You cannot wait to be led to that market. You need to go and be in front of it. Matt Mullenweg, CEO/founder of Automattic, revels in attending local WordCamp meetups around the world. It’s how he stays in touch with the local communities globally, and how he continues to spread the WordPress brand by staying inside the minds of the market.

You could think of your market potential progression in 3 stages (see figure):

  1. Product/Market Fit: Demand driven by early adopters of your product
  2. Growth: Reaching the fast followers
  3. Local Markets: Being in the global/local market where your prospects are

Here are some (partial) ideas for local outreach activities to assert your marketing presence in local markets:

  • Sponsor and/or attend local meetups
  • Create your own brand of events (e.g. WordCamp)
  • Get invited to fireside chats
  • Speak at conferences and participate in panel discussions
  • Visit your local customers
  • Send someone from headquarters to spend a week per city and have them infiltrate and participate in the communities where your target markets are

There is nothing wrong in having a strong head-office, but if you’ve experienced a relatively pleasant growth phase, and you’re wondering what’s next, you need to start asserting your presence where your market is. You can typically start with the major metropolitan or regional concentrations where your customers and prospects are. You don’t need to open new offices, but you may need to hire local people that are feet-on-the-ground with the local communities that you are trying to reach. If you don’t do that, you’re really making it harder on yourself to be successful, and making it easier for the competition to beat you if they are already local and you’re not.

Go capture the imagination of users where they are, and get into their minds early on, before the competition does.


Growth Hacking versus Product Vision

Ben-JasonThere’s something about the relationship between Growth Hacking and Product Vision that has been percolating in my mind, and I’m trying to put my finger on it.

I see startups that are obsessed with growth hacking to the point where they think it’s going to lead them to the product roadmap.

And I see startups that have a great product vision, but they keep adding features and capabilities without worrying about solid user traction.

Neither approach is ideal on its own; but the combination works well.

In the first case, the tail is wagging the dog. Your growth hacking may tell you what features are getting more engagement than others, but if you are just testing features, it’s like throwing darts on the wall, and forgetting you can have a solid arrow instead, with all the wood behind it.

In the second case, the wheels will eventually come off. Product vision delivery will get weakened if it’s not supported by solid user traction, engagement and repeat behavior. This means you may miss the Product/Market fit phase because you would have skirted around it.

Growth hacking alone cannot lead you to a product vision, but it can lead you to maximizing your product/market fit, if you already have a great product vision. They work together.

That’s why I’m interviewing Ben Yoskovitz and Jason Moore together, at the next fireside chat I’m organizing, October 21st 2014 at OneEleven.

Ben Yoskovitz (left) is an entrepreneur with a product management orientation, and he is the co-author of Lean Analytics, a widely read book on metrics for lean startups. Ben is currently VP Product, VarageSale, and was previously VP Product at GoInstant (acquired by Salesforce). Ben is also an active angel investor.

Jason Moore (right) is also an entrepreneur. He is the CEO and co-founder of Videostream, a Waterloo-based startup that is redefining how you watch streamed videos on your TV. Jason and his 3 co-founders were the first Canadian team to win the Startup Weekend competition in 2012, and went on to form a startup together, and were accepted at Hyperdrive, Communitech’s accelerator.

What Ben and Jason have in common is they are both leading product vision and delivery for their respective companies, and they are both Mobile App centric products. Ben’s orientation is slightly more tilted towards product and lean metrics, whereas Jason’s is an expert on growth hacking and measuring user engagement.

I am looking forward to exploring the overall relationships between product roadmap, product vision, lean analytics, growth hacking with Ben and Jason. Having both of them together means that we’ll able dive into these topics from two different points and experience angles, but also holistically covering how you can do both Growth Hacking and Product Vision well, together.

Eventbrite - Fireside Chat with Entrepreneurs Ben Yoskovitz and Jason Moore For more information about this event, please visit the Eventbrite link above, or register below: ]]>

7 Marketing Trends for Tech Startups in 2014

Good-Post-Ideas-FlowingOnline marketing continues to meddle with traditional marketing practices under the monikers of digital marketing, marketing automation, inbound marketing, growth hacking, and the omnipresent search engine marketing. Beyond these subjects, I’d like to focus on some important issues I’m seeing for startup marketing in 2014. They are a combination of priorities and trends, some familiar, and maybe others new. These aren’t the only priorities I see, but I chose to focus on them for this post.

1. The Product as a Medium

Marshall McLuhan was prescient when he said: “the medium is the message”. But today, if the product is also a medium, it gives it the ability to be the message, no? This means that the discovery, promotion, awareness and distribution of your product are enhanced via product usage. Of course, that doesn’t apply to all products, but it applies to an increasing number of products, whether they are online or physical. Twitter and Facebook are quintessential product-as-a-medium creations, because each time you tweet or use Facebook, you propagate their brand. Many products that have a social underpinning are inherently propagating themselves each time users share content or experiences emanating from that product. Peer-to-peer enabled services also have an inherent medium characteristic because a user has to interact with another user in order to consume a transaction; therefore they are propagating the brand along with the usage. Bitcoin is a great example of a medium that propagates its brand with each usage. Even a physical product can have a content-based component that is used to propagate the brand. If I share data from a physical intelligent product such as a wearable technology product, the shared data helps to market that product at the same time. ==>Take-away: Giving your product a medium characteristic will lubricate what you can do to market it.

2. Ad Tech Working for You

If you look at the evolution of Internet advertising, the banner was the original innovation, but it ran out of steam due to an elusive ROI. Then, the Ad Exchanges flourished with programmatic advertising, but it was all controlled and centralized by them, i.e. you had to plug into their magic. Today, one-to-one advertising is closer to reality, for several reasons. One, we can have more precision in audience segmentation and targeting via contextual and user behavior data, as well as analytical insights. Two, we can track with incredible precision the entire lifecycle of a user’s interaction, from ad serving, to ad performance, to user engagement, and in some cases down to the revenue line. This makes digital advertising pretty effective, and it allows a new level of real-time optimization that wasn’t possible before. Of course, social platforms like Twitter and Facebook are ahead of the pack in terms of this level of end-to-end precision. Mobile Ad networks are following closely because the mobile medium is easier to define than the entire web. And some progressive Web Ad networks are also improving and modernize their offerings. This provides a great opportunity for marketers who want to reach their intended customers with a greater level of precision and lower entry costs than before. ==>Take-away: You can start with small budgets, but insist on detailed end-to-end analytics that include optimization, detailed tracking and revenue linkages.

3. The Digital Brand Starts to Matter

We can target customers on social media and online properties, but can we build a brand on them? Marc Andreessen aptly described that conundrum in this recent Fortune interview, noting that Google is not so good for digital branding, having only captured the direct marketing segment. While the topic of branding and the digital brand is a complex one, whether a company can build or enhance its brand online is a pertinent topic. It’s easy to see how Net native brands like Dropbox, HubSpot, MailChimp Snapchat or Vine are top of mind with Internet users, but could you move the needle online for products that aren’t natively digital? Take Jelly as a new social product experiment. The jury is still out on its usefulness for marketing, with both sides making some good arguments: Why marketers should get ready for Jelly, vs. Goodbye for now, Jelly – it’s not you, it’s the marketers. Maybe it’s a question of timing, but it is certainly a question on marketers’ minds. There is hope for digital brand development. According to this comScore study, Facebook ads can improve brand preference, citing the effect of vehicle consideration based on campaigns exposure. Pinterest is also expected to become a key player in the digital brand landscape. ==>Take-away: Building your brand online must be done, but there is no cookbook. In the absence of a formal budget for online advertising, use content marketing to spread your brand’s visibility online.

4. Mobile Marketing for the non-Apps

Mobile marketing is a puzzle you will need to solve, whether you have a mobile App or not. Millions of first time users aren’t jumping on desktops anymore. Their first Internet experiences are restricted to tablets or smartphones. That’s why there is a lot of traffic activity to direct users to mobile Apps. But what if you don’t have an App, and you would like to market to mobile users? Then, your marketing should target two new sectors: a) mobile users that are spending time on mobile content, preferably via native advertising means, and b) in-app advertising, also native to the app, but more contextual in nature (e.g. via YieldMo for both). ==>Take-away: Find your on-ramps to the mobile market.

5. Advocate Marketing Becomes Important

When you look at the 3 horizons that marketing targets, you’ve got 1) building Awareness, 2) generating Demand, and 3) increasing Loyalty. In other words, all businesses have Prospects, Customers, and hopefully Loyal Customers. The highest type of loyalty value is manifested when your customers become Advocates, i.e. when they revel in not just telling others about your products, but also in helping you to get new ones. As marketers, we spend a ton of money on awareness using a variety of methods (advertising, sponsorships, etc.), and we use a ton of software to manage prospects and leads, but we often neglect to formally manage our best customers (the advocates). Your advocates are probably the easiest group of people to establish a relationship with, because they are totally committed to your product. You just need to lightly orchestrate their actions in areas like referrals, case studies, reviews, and allow them to communicate their expertise to their peers. The outcome is you’ll soon be collecting high quality leads coming from your advocates, or closing other ones with their help. ==>Take-away: Formalize your program and relationships with your best customers via an Advocate Marketing platform (e.g. via Influitive).

6. Getting Inside The Sharing Economy

The peer-to-peer nature of transactions and bottoms-up services delivery is a new and big chapter in the Internet’s evolution. The result is almost an underground economy that is real, but often invisible, and even sometimes unaccounted for. Take any industry, and you will find a new peer-to-peer component that is starting to emerge: venture capital, banking, loans, travel, hospitality, logistics, transportation, education, cooking, shopping, etc. Newer decentralized networks where power and value lie at the edges are eroding the market shares of traditional centralized electronic marketplaces. The question becomes how to place your company around or inside this activity, with relevancy and effectiveness? That will be an interesting challenge that marketers will face. ==>Take-away: Find ways to participate in the peer-to-peer economy.

7. Marketing Triage is the Biggest Skill

The most critical marketing skill that startups need to master is not a marketing activity. Rather, it is a triage and timing skill. It’s about knowing which marketing activity to focus on, and which ones to ignore, depending on where you are in your evolution. Marketing is a mixed set of activities (that’s why it is called “the marketing mix”). It is not one thing, but rather several things, sometimes working one after the other, and sometimes in parallel. If you work for a big company, your marketing group is probably large, and you’re probably doing each one of about 50 marketing activities. That makes your marketing a lot easier than a startup that needs to figure out what not to do, and what to start doing first. So, one cannot compare the marketing needs of startups to those of grown-up companies. A larger company manages a portfolio of marketing activities, and choice is not typically their issue, rather they need to do several things well. A startup doesn’t have the luxury (or the need) to implement 22 or 44 various marketing activities. They need to keep it simple initially, and do a handful of things well. I will be writing more about how startups prioritize their marketing activities.]]>

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