Psychology of Product Adoption

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

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

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

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

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

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

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

Contents
 Overview
 Give and Get Dynamics

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

Contents
 Overview
 Give vs. Get

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

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

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

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

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

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.

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)





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

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

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

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
>>

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)

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

Psychology of Product Adoption

Recomendados

Recomendados

Mais conteúdo relacionado

Mais de Flevy.com Best Practices

Mais de Flevy.com Best Practices (20)

Último

Último (20)

Psychology of Product Adoption