Psychology of Consumer Product Adoption

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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.
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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

The Prospect Theory Value Function illustrates the consumer bias by
displaying the relationship between subjective gains and objective gains
Prospect Theory – Value Function
From the Prospect Theory Value Function, we can ascertain 4 insightful principles.
Objective
Gains
Objective
Losses
Subjective
Gains
Subjective
Losses
+$100
V(+$100)
V(-$100)
-$40
Refers to
psychological
impact
• In this example, when we
evaluate gains, the subjective
(i.e. psychological) gain
matches the actual, objective
gain
• But, when we evaluate the
loss, even though it is only
-$40 in reality, psychologically,
it is equivalent to a $100 loss
• Thus, in this example , even
though the Net Objective
Value is $60, the Net
Subjective Value is $0
Reference Point
This is the current
wealth state
Source: Prospect Theory: An Analysis of Decision under Risk, Kahneman
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-$40
Reference Point
Principle #2:
Reference points matter
Prospect Theory – Principle #2
Reference points matter, because the same result may be considered a “loss” for one
consumer and “gain” for a different consumer.
• “Gains” and “losses” are evaluated with respect to some reference point
• This reference point is currently the person’ status quo, i.e. the person’s current
state of wealth or being
• Relative to this status quo, additions to the state of being are viewed as gains
and subtractions to that state are viewed as losses
• In a market, providing a new benefit is a gain and removing a benefit is a loss
• Likewise, decreasing an existing cost is a gain and adding a new cost is a
loss
• It is important to note that different people—i.e. different consumers—have
different status quos—i.e. different reference points
• For instance, if the average price of a gallon of gas in the US is $3.50, while
the average price in the UK is $10
• Therefore, if a typical US consumer goes to a gas station charging $5, he will
be outraged, while a UK consumer will be ecstatic

+$100
V(+$100)
V(-$100)
-$40
Principle #4:
Aversion to losses
Prospect Theory – Principle #4
• This is perhaps the most important principle—consumers do not
treat comparable sized gains and losses the same
• In other words, being forced to give up a specific benefit creates
significantly more pain than getting the same benefit creates pleasure
• Studies show that “losses” typically prove to be 2-3 times more
painful than comparably sized “gains” prove pleasurable
• This asymmetry is known as “loss aversion”
• Loss aversion is exhibited when dealing with money (e.g. as
gambling), as well as for apartments/homes, hunting licenses,
coffee mugs, and most other market goods
Moral of the story: losses loom larger than gains.
This steeper slope
indicates the
asymmetric behavior
of loss aversion

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

The “freemium” business model takes advantage of the Endowment Effect
Freemium Model
This business model is effective because it changes the customer’s point of reference
to one where he needs to give up a benefit.
Freemium is a business model, where an offering is provided for free, but money is charged for
enhanced functionality. Another version of this model is where the offering is provided for free for
a limited, trial period.
SMALL MEDIUM ENTERPRISE
  
  
 
 


$0 $10 $100
• This business model is popular
among Internet SaaS providers
• The Prospect Theory also
explains why it’s more difficult to
convince a customer to spend
that first dollar than all future
spend

Each time a customer gets something new—e.g. our new product—he also
has to give something up
Give vs. Get
The objective value of the new product needs to exceed the objective value of the
existing product by at least 3X—preferably 10X.
• With any new market offering,
there are “give” and “get” dynamics
at play
• We are forcing a customer to give
up an existing benefit (the existing
market solution) and, in return, get
a new benefit (our new offering)
• By Prospect Theory and
Endowment Effect, we know
benefits given up loom 2-3 times
greater than the benefits to be
gained
What does this imply?
• For a new product offering to be perceived as better
than its predecessor, it must be significantly better to
overcome consumer biases
PSYCHO-
LOGICAL
OBJECTIVE
=

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

Here are examples of “gives” and “gets” of various recent innovations
Examples – “Gives” and “Gets” of Innovations
DVR/TIVO (Digital Recorders) Ability to play rentals Easy recording
Electric Cars Easy refueling Environmental friendliness
Online Grocery Ability to select freshest Home delivery
Video Rentals by Mail Spontaneity Increased selection
New Drugs Low cost Fewer side effects
Satellite Radio Free music Better selection
New Medical Procedures Comfort with procedure Better outcomes
Wind Energy Unobstructed view Clean, renewable energy
INNOVATION
What you give up What you get
VS
VS
VS
VS
VS
VS
VS
VS

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

The Electric Car is an example of an innovation that falls under
the Scenario 3 model
Case Example: Electric Car
• Let’s consider the adoption of the electric car, which has long been proclaimed as a replacement for the
gasoline-powered car
• Gains include:
• Energy efficiency
• Lower cost of ownership
• Less pollution
• Losses (i.e. what the driver wil be giving up) include:
• Size
• Convenience
• Cruising range
• Since the driver is used to size, convenience, and cruising range to be part of his status quo (i.e. his
reference point), these losses will be overweighted by his innate psychological consumer bias
• On the contrary, the benefits of energy efficiency, lower operating cost, less pollution are benefits that
will be underweighted
• Thus, the psychological tradeoffs strongly favor the existing gas-powered car
• No matter the benefits, the losses, unless addressed directly, will greatly hinder adoption
Costs Benefits
SCENARIO 3

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 1:
Brace for the long haul
Strategy – Brace for the Long Haul
In the Product Lifecycle Curve, there is often a need to “cross the chasm” to reach the
Early Majority—this chasm is particularly wide for Long Haul products.
The 10X
Improvement
Brace for the
Long Haul
Make It
Behaviorally
Compatible
Seek out the
Unendowed
Find
Believers
Eliminate
the Old
• The simplest strategy for dealing with consumer resistance is to
accept it and brace for the slow adoption known as the Long Haul
• While this may be difficult to do, a firm can be successful with this
strategy
• But, a firm must recognize that this is the strategy they have
adopted—i.e. it must forecast its demand and growth accordingly
• Examples of companies that failed to do this include TiVo and
Webvan
• Examples of companies that have achieved slow but steady
adoption:
• ESPN, took 25 years to reach 80% of U.S. households
• Telephone, VCR, PC
TINKERING
DEAD
ZONE
HOME
RUN
LONG
HAUL





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 5:
Seek out those who are already “believers”
Strategy – Find Believers
This thinking is captured in Clayton Christensen’s concept of “disruptive technology.”
The 10X
Improvement
Brace for the
Long Haul
Make It
Behaviorally
Compatible
Seek out the
Unendowed
Find
Believers
Eliminate
the Old
• Companies can seek out customers that either greatly value the benefits to be gained or do not value
the benefits given up
• For instance, here are some things fuel cell vehicle manufacturers could do:
• The company could target consumers who are environmentally conscious
• The company could target consumers who live in a community where a central refueling station is
more practical—e.g. consider an island community, where an entire day’s travel might only take
the owner 10 miles
• In these communities, convenient refueling is probably valued less and emission-free
transportation value more
• For many of these reasons, Iceland (an island community) is at the forefront of developing a fuel
cell society

PPT Lab (www.pptlab.com) is the only crowdsourced
presentation design service. Get consulting-quality
presentations at a fraction of the cost!
Each month, we will create well over 50 slides of for our members.
As a member, you will drive what business slides we create by
submitting your own presentation projects to our team. All
presentations will be created by a team of management
consultants and follow the Consulting Presentation Framework.
www.PPTLab.com
support@pptlab.com

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