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Psychology of Product Adoption

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Some innovations are truly spectacular, but consumers are slow or just refuse to adopt. In fact, over 70% of all new products fail in the marketplace--and innovative, new products fail at an even higher rate.

Why is this the case? And, how do companies overcome this?

This document discusses the psychology of product adoption. Topics include Prospect Theory, Endowment Effect, Loss Aversion, Give and Get Dynamics, Innovator's Curse, Product-Behavior Value Matrix, among other topics. It distills these concepts into Six Product Launch Strategies.

This presentation has instructional slides and examples.

The foundation of this consumer adoption discussion is around the difference between objective gains and losses vs. subjective gains and losses. This fundamental consumer bias results in psychological switching costs, in addition to economic ones. Studies have shown that, psychologically, losses loom larger than gains by two to three times.

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  • 1. Crowdsourced Business Presentation Design Service Psychology of Product Adoption Why Consumers Don’t Buy April 28, 2013 This document presents multiple business frameworks that discuss the psychology of Consumer Product Adoption. Topics include Prospect Theory, Endowment Effect, Loss Aversion, Give and Get Dynamics, Innovator’s Curse, Product-Behavior Value Matrix, among other topics. It distills these concepts into Six Product Launch Strategies. ORIGINAL PROJECT DETAILS http://pptlab.com/ppt/Why-Consumers-Dont-Buy-The-Psychology-of-New-Product-Adoption-16
  • 2. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 3 Contents  Overview 4  Prospect Theory and Endowment Effect 7  Give and Get Dynamics 15  Equal Net Benefit Scenarios 19  Innovator’s Curse 26  Product-Behavior Value Matrix 32  Product Launch Strategies 38
  • 3. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 5 This document discusses the psychology of consumer product adoption Executive Summary Some innovations are truly spectacular, but consumers are slow or just refuse to adopt. In fact, over 70% of all new products fail in the marketplace—and innovative, new products fail at an even higher rate. Why is this the case? And, how do companies overcome this? This document discusses the psychology of product adoption. Topics include Prospect Theory, Endowment Effect, Loss Aversion, Give and Get Dynamics, Innovator’s Curse, Product-Behavior Value Matrix, among other topics. It distills these concepts into Six Product Launch Strategies. The foundation of this consumer adoption discussion is around the difference between objective gains and losses vs. subjective gains and losses. This fundamental consumer bias results in psychological switching costs, in addition to economic ones. Studies have shown that, psychologically, losses loom larger than gains by two to three times. Objective Axis Subjective Axis +$100 V(+$100) V(-$100) -$40 Reference Point
  • 4. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 7 Contents  Overview  Prospect Theory and Endowment Effect  Give and Get Dynamics  Equal Net Benefit Scenarios  Innovator’s Curse  Product-Behavior Value Matrix  Product Launch Strategies
  • 5. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 9 Losses Reference Point Principle #1: Individuals are sensitive to gains and losses Prospect Theory – Principle #1 Gains and losses are also evaluated against some reference point. Subjective Gains Objective Gains • Consumers don’t evaluate outcomes in an absolute manner—they evaluate in terms of ―gains‖ and losses‖ relative to some reference point • This sensitivity can be observed in the physical world • For instance, it is much easier for someone judge changes in temperature than to judge absolute temperatures • Therefore, 50oF feels pleasant and warm in the winter, but uncomfortable and cold in the summer • When we relate this to economics, the same holds true • For instance, regardless of the person’s wealth, he will win pleasure when unexpectedly winning $100 and displeasure when receiving a $100 traffic ticket Gains Source: Prospect Theory: An Analysis of Decision under Risk, Kahneman
  • 6. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 11 Principle #3: Decreasing marginal sensitivity Prospect Theory – Principle #3 Subjective Gains V(+$100) • As gains and losses increase, people become less sensitive to the marginal increase • This can be seen by how the curve for gains is concave, whereas the curve for losses is convex As gains increase, it really needs to be significant for the consumer to feel it. Source: Prospect Theory: An Analysis of Decision under Risk, Kahneman
  • 7. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 13 People value items in their possession more than items not in their possession The Endowment Effect The implication is you are more likely to spend more (e.g. money, time, effort) to keep something you have than to obtain something for the first time. People value items in their possession (or part of their endowment) more than they value items not in their possession—this is known as the Endowment Effect. Pause Live TV V(Pause Live TV) V(-Pause Live TV) -Pause Live TV WHEN WE CURRENTLY DO HAVE IT Pause Live TV V(Pause Live TV) V(-Pause Live TV) -Pause Live TV WHEN WE CURRENTLY DON’T HAVE IT Person currently does NOT have TIVO/DVR Person currently DOES have TIVO/DVR Source: Toward a Positive Theory of Consumer Choice, Kahneman
  • 8. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 15 Contents  Overview  Prospect Theory and Endowment Effect  Give and Get Dynamics  Equal Net Benefit Scenarios  Innovator’s Curse  Product-Behavior Value Matrix  Product Launch Strategies
  • 9. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 17 Remember also that benefits you get are typically delayed, uncertain, and difficult to quantify Additional Considerations All these factors further hinder adoption and contribute to the ―chasm‖ to cross prior to reaching the market majority. TIMING CERTAINTY ABILITY TO QUANTIFY Immediate Delayed Certain Uncertain Easily quantified Hard to quantify (e.g. convenience, quality) for a easily quantified cost (e.g. money)       ―Gives‖ are… ―Gets‖ are… Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003
  • 10. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 19 Contents  Overview  Prospect Theory and Endowment Effect  Give vs. Get  Equal Net Benefit Scenarios  Innovator’s Curse  Product-Behavior Value Matrix  Product Launch Strategies
  • 11. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 21 Scenario 1: Cost Savings with Same Benefit Equal Net Benefit Scenarios – Scenario 1 From both an economic and psychological perspective, the new product offering will be perceived as pure gain. Costs Benefits SCENARIO 1 • In this first scenario, the new product offers the same benefits as the existing product, but at a much lower cost • This lower cost may not be financial—e.g. it can be lower level of effort, lower time commitment • Examples: • Generic label drug that costs less than the brand name • New drug formula that requires less dosages
  • 12. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 23 Scenario 3: New Costs and New Benefits Equal Net Benefit Scenarios Most new products fall under this scenario. Costs Benefits SCENARIO 3 • In this last scenario, there are both costs and benefits—the added benefits outweigh the additional costs and the net benefit is the same as the previous 2 scenarios • From a rational perspective, this scenario is equivalent to the others—but from a psychological perspective, this scenario offers much less benefits than the others • Asking customers to make this type of tradeoff will often prove fatal to the company, since we now know losses loom greater than gains • This tradeoff oftentimes is a large contributing factor a product launch’s failure
  • 13. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 25 Online Grocery is another example where, objectively, the benefits are clear—but psychologically, the net benefit is lost Case Example: Online Grocery • Though online grocery has gained traction in some markets, this business model has consistently struggled to gain customer adoption • This is another example of an innovation with both costs and benefits • Gains (or benefits) include: • Convenience • Time savings • Effort savings • Losses include: • No longer can one hand select items (e.g. picking ripe fruits) • No longer can one use the store as a mental prompt for what times to shop for • No longer can the store provide inspiration for dinner plans • Looking at this objectively, the benefits clearly outweigh the ―costs,‖ which seem trivial • However, for more individuals, the effort, time, and inconvenience associated with shopping has already been ingrained in the shopper’s status quo as a necessary evil • Thus, having to instead now spend time on the computer, pay for delivery, and be home in the delivery window is now perceived as additional costs Costs Benefits SCENARIO 3
  • 14. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 27 As the product innovator, we become inherently biased in our perceptions of the product’s benefits and costs Innovator’s Curse Innovators are ill-suited to judge the potential and perceived benefits of their own innovations Self-Selection Clash in Perspectives Curse of Knowledge 3 2 1 • The folks who develop and invest in innovations believe in these innovations—therefore, it’s a self-selected population of product innovators/early adopters for this specific innovation • The question is—are their views shared by the greater population? • The point of reference (i.e. current state of being) of the target customer may be different from that of the innovator’s • Remember the Endowment Effect—keep in mind the innovator has already experienced the product • The ―Curse of Knowledge‖ states that people find it very difficult to remember what they knew prior to knowing what they know now • In other words, once we learn some information, we find it difficult to appreciate what a person who does not know the information might be thinking
  • 15. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 29 Curse 2: Clash in Perspectives Innovator’s Curse – Clash in Perspectives Self-Selection Clash in Perspectives Curse of Knowledge 321 • The status quo for the typical customer will be that which the customer currently knows—this status quo is likely different from the innovator, who is fully invested in his innovation • Imagine being on the development team of a new product—during the development process, you become intimately familiar with the product, with all of its benefit, and it becomes part of your status quo • This difference in perspectives serves to magnify the gap between the developer and the typical consumer—whereas the typical consumer outweighs the benefits of the existing product to the innovation by a factor of 2-3X, the innovator outweighs the benefits of the innovation by a factor of 2-3X • This results in a potential compounded bias of 9X CONSUMER’S VIEW NEUTRAL VIEW DEVELOPER’S VIEW V ( New | Old ) V ( New ) V ( Old | New )< < Consumer’s Endowment Bias (3:1 Underweighting) Developer’s Endowment Bias (3:1 Overweighting) Compounded Bias of 9X Andy Grove has stated that for rapid, widespread adoption, a new product has to offer 10X improvement over the incumbent alternative
  • 16. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 31 There is a disconnect in knowledge and perspective between the innovator and customer Innovator’s Curse – Curse of Knowledge (2 of 2) Self-Selection Clash in Perspectives Curse of Knowledge 321 INSIDER’S VIEW What’s the innovator’s profile?  5, 10, 20 years of experience with product or technology  Benefits/needs are obvious  Fully trusts product  A self-selected believer  Status quo includes new features OUTSIDER’S VIEW What’s the customer’s profile?  Seeing product for 1st time  Needs are not obvious  Skeptical of claims  Moderate valuation of promised benefits  Status quo includes existing features KNOWLEDGE AND PERSPECTIVE DISCONNECT There problem here is not the customer’s failure to ―understand‖—but the innovator’s failure to anticipate this predictable lack of understanding.
  • 17. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 33 How do we capture value from innovations? Product-Behavior Value Matrix TINKERING DEAD ZONE HOME RUN LONG HAUL Low High Low High Value Creation Value Capturing Product change required Behavioral change required • Innovations create value through product changes • Product changes often require behavioral changes • There problem is product adoption, from the principles discussed, is hindered by a need for behavioral change • This dynamic results in a 2x2 matrix, known as the Product- Behavior Value Matrix • A ―Home Run‖ product will maximize value creation (product changes), while minimizing value capturing (behavioral changes)     Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003
  • 18. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 35 If our product offers minimal product change, but requires high behavior change… maybe we should think twice Product-Behavior Value Matrix – Dead Zone TINKERING DEAD ZONE HOME RUN LONG HAUL • ―Dead Zone‖ products, as the name suggests, should be avoided by companies—in order words, companies should avoid creating products that require high behavioral change, but offers little product change • The Dvorak keyboard was an innovation that attempted to replace the traditional QWERTY keyword • While it offered faster typing speeds, the initial behavioral change hurdle of learning an entirely new keyboard configuration was too great • Plus, since people could type fast enough with the QWERTY keyboard, any increase to typing speeds with a new keyboard would only be marginal • In terms of product change, it was minimal, since it only required rearranging the keys on the keyboard • Even objectively evaluated, the tradeoff of a ―Dead Zone‖ is undesirable—when taking into account that losses loom larger than gains by 2-3X, the tradeoff is incomprehensible Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003
  • 19. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 37 The “Home Run” product offers the best of both worlds— high product change, nominal behavior change Product-Behavior Value Matrix – Home Run TINKERING DEAD ZONE HOME RUN LONG HAUL • ―Home Run‖ products are the best of both worlds—offering great product change, but requiring minimal behavioral change • These products stand the greatest chance of both short-term and long-term success • Value is created by offering a fundamentally new way of achieving some goal • Value is captured by limiting the change required of customers • An example would be the hybrid-electric vehicle (HEV), also just called the hybrid car • These vehicles boost gas mileage by as much as 100% • There are no benefits given up and only limited additional costs are incurred (which is the premium purchase price) • These cars also require no behavioral change—they look, drive, and refuel like any other car on the road Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003
  • 20. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 39 In most cases, behavioral change is inevitable—here are 6 product launch strategies that accept the fact that customers will show resistance Product Launch Strategies For most innovations, behavioral change is inevitable—and thus, adoption resistance is inevitable. There are 6 broad strategies that companies can adopt, depending no whether they want to accept resistance or minimize resistance. ACCEPT RESISTANCE MINIMIZE RESISTANCE Brace for the Long Haul The 10X Improvement Make It Behaviorally Compatible Seek out the Unendowed Find Believers Eliminate the Old 1 2 3 4 5 6 • If behavior change is a given for your innovation, then it is wise to accept resistance and manage it accordingly • The strategies that fall within accepting resistance may be unattractive or impractical—in such cases, there is a need to focus on minimizing resistance Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003
  • 21. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 41 Strategy 2: Make a product that’s 10X better Strategy – The 10X Improvement Remember, benefits aren’t just financial. The 10X Improvement Brace for the Long Haul Make It Behaviorally Compatible Seek out the Unendowed Find Believers Eliminate the Old • The alternative approach to accepting change is to just make the benefits of the innovation overwhelming • Even with the overweighting of losses to gains, make sure the tradeoff significantly favors the new product innovation • Andry Grove’s 10X Rule is an example of this strategy >> Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003
  • 22. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 43 Strategy 4: Find the unendowed—i.e. the first time buyers Strategy – Seek Out the Unendowed It may be easier to launch in an emerging market than an established one—emerging markets (i.e. BRICS nations) are filled with first time buyers. The 10X Improvement Brace for the Long Haul Make It Behaviorally Compatible Seek out the Unendowed Find Believers Eliminate the Old • To minimize or eliminate behavior change, companies can seek out customers who are not currently endowed with the existing product—i.e. first time buyers • The first time buyer do not have preset biases over benefits lost and new costs incurred • The first time buyer’s status quo is neutral • In 1900, George Eastman introduced his $1 Kodak Brownie camera by targeting first-time buyers, not professional photographers and serious amateurs (i.e. existing customer base) • The professional photographer and serious amateur came to detest the Kodak Brownie, because it offered a set of benefits they had learned to live without (e.g. convenience, ease of use) and sacrificed benefits they were used to (e.g. picture quality) Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003
  • 23. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 45 Strategy 6: Finally, when all else fails, eliminate the old Strategy – Eliminate the Old Unfortunately, many companies, particularly startups, do not have the resources or influence to do this. The 10X Improvement Brace for the Long Haul Make It Behaviorally Compatible Seek out the Unendowed Find Believers Eliminate the Old • This is perhaps the fall back strategy • When all else fails, try to eliminate the existing product • Many companies employ a similar tactic when they retire older versions of product to facilitate quicker adoption of the new model Source: Why Consumers Don’t Buy: The Psychology of New Product Adoption, HBR, 2003

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