You have a great new solution that you believe passionately will help people get an important job done way better than what they are achieving today. But your new solution requires the customer to change how she is getting her job done currently. Even though she can imagine how your new innovation can make her life better, she just won’t make the leap. Why not?
The reality is adopting innovation requires behavioral change. And most people really don’t like change. We enjoy predictability and tend to stick with the tried and true way of getting things (jobs) done. It’s familiar to us, and doesn’t require us to invest time, money and effort in learning a new approach.
Adoption of innovative new ideas requires behavioral change
In John T. Gourville’s seminal article “Eager Sellers, Stony Buyers,” (HBR June 2006), he addresses two important questions:
- Why do consumers fail to buy innovative products even when they offer distinct improvements over existing ones?
- Why do companies invariably have more faith in new products than is warranted?
Gourville’s quick answer is: “Many innovations fail because consumers irrationally overvalue the old, and companies irrationally overvalue the new.”
Economic Switching Cost Versus Behavioral Change
The economic cost of switching represents a real barrier for consumers. In fact, switching cost is a well-known strategy to lock customers into your platforms and products. Economic switching barriers include:
Transactional cost to move from one solution platform to the next: For example the activation fees consumers have to pay when they switch from one cable provider to another. And the cost of migrating data and other assets (including processes) from an old to new platform. For example upgrading an MRP platform to an ERP platform. It’s not simply a flip of a switch.
Learning cost. Learning takes time, and time cost money. Back to the MRP to ERP platform. In addition to the cost of migrating data, systems and processes also need to be re-created to take advantage of the ERP platform, including training employees on using the ERP application.
And then there are obsolescence cost. For example, switching from a PC to Mac. In addition to the learning curve and data migration, it’s likely there will be a host of applications and associated data (for example native files) people use on their PC that aren’t available on the Mac. Switching to Mac would entail a “loss” in the mind of the consumer.
Economic cost can be addressed upfront
In theory, the pure economic switching cost barrier can be addressed by providing a “rational” cost/benefit analysis. For example, a rival cable company, say Direct TV, can present a financial case as well as a set of benefits (e.g. NFL football package) that shows the economic and functional gain of switching.
But if the rational economic benefit to switch from one platform to the next isn’t substantial (Gourville argues it takes 10 x benefit for consumers to make a switch), the majority of customers won’t switch. As we shall see, there is more at stake than just the economic benefit.
The psychology of behavior change
John Gourville argues that the psychology of behavior change explains why so many products fail. People tend to overvalue what they have, and companies overestimate the new value their solutions bring to the party.
In economics and decision theory, loss aversion 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. (source: https://en.wikipedia.org/wiki/Loss_aversion)
According to the theory, when faced with alternatives (choices and decision), people respond using for basic characteristics:
1) People evaluate the attractiveness of an alternative based not on its objective, or actual value, but on its subjective value.
2) Consumers evaluate new products relative to a reference point, usually the products they already own or consume.
3) People view any improvements relative to this reference point as gains and treat all shortcomings as losses.
4) Losses have a greater impact on people than similarly sized gains (loss aversion).
Clearly the threat of losing data and time required to migrating from one software platform to another is perceived as a huge potential loss, even in light of the potential upside in new productivity.
The “endowment effect” and “status-quo bias”
The endowment effect describes a circumstance in which an individual values something which they already own more than something which they do not yet own. Once someone owns something, he places a higher value on it than he did when he acquired it—an observation first called “the endowment effect” by Richard Thaler (circa 1980).
The endowment effect explains why people place more value in their existing solutions than the new ones. And why marketers tend to overestimate the value of their solutions due to their own endowment effect – that is to say, they have become too close to their own solution and no longer see the downside of loss customers perceive.
Status quo bias is an emotional bias; a preference for the current state of affairs. The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss. The status quo bias is a cognitive bias for the status quo; in other words, people tend to be biased towards doing nothing or maintaining their current or previous decision.
In general, people may find themselves continuing to do something because they’re used to it, without questioning whether there might be a better way. Or they believe the effort it requires to make the change is just too risky and expensive – relative to the gains they may achieve by switching.
Capturing value by minimizing behavior change
In the diffusion of innovation, Rogers references the attribute “compatibility” as “the degree to which an innovation is perceived as consistent with the existing values, past experiences, and needs of potential adopters.” The further away a new innovation departs from established norms and experiences of consumers, the harder it will be to create and capture a new market.
By creating “behavioral” compatible products, an innovator stands a greater change of launching a successful new product. The more familiar with current practices and understanding, the more likely adoption will occur.
Of course radical breakthroughs often require significant behavioral change. If your innovation requires a radical change in consumer behavior, accept the fact that change can happen slowly. So best to plan for a long haul and build market acceptance one niche at a time starting with early adopters, and work your way towards critical mass adoption.
Here’s to changes, the only true constant in our brave new world!