Identifying & Winning Customers Prof. Stephen Lawrence Deming Center for Entrepreneurship Leeds School of Business University of Colorado Boulder, CO ESSAM 2010

Agenda Global Cultural Differences ▫Hofsteder cultural dimensions Overcoming customer resistance ▫Prospect theory Finding your first customers ▫Crossing the chasm Convincing customers to buy ▫WIFM

Hofsteder Cultural Dimensions

Hofstede Cultural Dimensions Power Distance (PDI) ▫Acceptance of unequal power distribution Individualism (IDV) ▫Extent of identification with a group Masculinity (MAS) ▫Degree of differentiation in gender roles Uncertainty Avoidance Index (UAI) ▫Measures cultural concerns about the unknown Long Term Orientation (LTO) ▫Cultural focus on the future; “time-horizon”

Hofstede Score Comparison

BRIC Hofstede Scores

Uncertainty Avoidance

Hofsteder IDE vs. PDI Metrics

Prospect Theory Kahneman and Tversky

Examples of Customer Resistance Webvan (online groceries – 1999) ▫Burned through $1 billion in 2 years Segway PT transport vehicle (2002) ▫Sales 100X less than forecast TiVo digital TV recorder (2004) ▫Rave reviews, but slow sales U.S. $1 coin (2007) ▫Available, but never used Gourville, Why Consumers Don’t Buy, HBS Note, , 2004

Asymmetric Perceptions of Risk 1.Which bet would you choose? a.A sure $20 b.A one-third chance of gaining $60. 2.Which bet would you choose? a.One-third chance of losing $60 (with a two-thirds chance of losing nothing) b.A certain loss of $20 3.Most choose 1a and 2a ▫Sure $20 gain (risk-aversion) ▫Expect $20 loss (risk-seeking)

Risk Framing Effects Which do you choose? ▫A new drug can save 200 of 600 people suffering from a fatal disease ▫A second new drug will allow 400 of 600 affected people to die Most people choose (a) ▫Risk averting in (a) ▫Risk seeking in (b) We fear losses more than we value gains

Endowment Effect People value items in their possession more than those items not in their possession Innovation demands change ▫Giving up a known endowment (possession) ▫Getting a new unknown possession Old benefits valued at 2-3X than new New costs valued at 2-3X larger than old Gourville, Why Consumers Don’t Buy, HBS Note, , 2004

Prospect Theory Objective Losses Objective Gains Subjective Losses Subjective Gains Gourville, Why Consumers Don’t Buy, HBS Note, , 2004 Status Quo Rational (subjective = objective)

Costs and Benefits Costs Benefits Costs Benefits Scenario 1Scenario 3 Gourville, Why Consumers Don’t Buy, HBS Note, , 2004 Scenario 2 Costs Benefits Consumer Response ?

Rules of Prospect Theory Individuals are sensitive to gains & losses Aversion to losses ▫Losses loom larger than gains Reference points (framing) matters ▫Evaluations relative to status quo Decreasing marginal sensitivity ▫More not proportionally better than less Gourville, Why Consumers Don’t Buy, HBS Note, , 2004

Making Matters Worse Timing ▫Upfront costs vs. accrued benefits ▫Example: Compact fluorescent bulbs Uncertainty ▫Certain costs vs. uncertain benefits ▫Example: Corporate intranet Qualitative benefits ▫Costs are quantitative, benefits qualitative ▫Example: Online troubleshooting Gourville, Why Consumers Don’t Buy, HBS Note, , 2004

Entrepreneur’s Curse Problem #1 – Self-Satisfaction Problem #2 – Clash of Perspectives Problem #3 – Curse of Knowledge Long experience with product Benefits/needs obvious Fully trusts technology Self-selected believer Status quo includes new product Sees product for 1 st time Needs/benefits not obvious Skeptical of claims Mid-valuation of benefits Status quo includes features Gourville, Why Consumers Don’t Buy, HBS Note, , 2004 Entrepreneur’s View Customer’s View

Capturing Value 2. No Sale 3. Long Haul 1. Tinker 4. A Winner! Required Behavioral Change (value capturing) Degree of Product Benefit (value creation) High LowHigh Low Gourville, Why Consumers Don’t Buy, HBS Note, , 2004

Resistance Strategies Accept Resistance 1.Brace for the long haul 2.Look for 10X improvements Minimize Resistance 3.Make an innovation behaviorally compatible 4.Seek out the unendowed 5.Find believers 6.Eliminate the old Gourville, Why Consumers Don’t Buy, HBS Note, , 2004

Lessons Focus on savings and cost reduction ▫Painkillers versus vitamins Minimize required behavioral change ▫Even if benefits are fewer Frame product appropriately ▫Positive emphasis ▫“We save lives” vs. “We prevent deaths”

Crossing the Chasm

Crossing the Chasm

The “Chasm” Techies and Visionaries ▫Enthusiastically embrace new technologies Pragmatists ▫Want to see a total solution ▫Won’t settle for 80%; only 100% ▫Want a whole product solution to problem Firms typically ▫Try to satifice across many customers, ▫But completely satisfy none Moore, “Crossing the Chasm – and Beyond,” in Strategic Management of Technology and Innovation, Burgelman et al., 2004

How to “Cross the Chasm” Focus on a single industry or segment ▫Put all your eggs in one basket Develop 100% of a whole solution for this narrower niche Gain a committed beachhead among pragmatists within the niche Grow into other niches with success Moore, “Crossing the Chasm – and Beyond,” in Strategic Management of Technology and Innovation, Burgelman et al., 2004

Framing Focus on the customer benefits of your offering ▫Do not focus on its features Focus on reducing losses (pain) if possible ▫Add in benefits if available Focus on benefits as necessary ▫Diminish perception of costs (e.g., 3 easy payments)

“Tune your Radio to WIFM” WIFM – “What’s In it For Me?” This is the favorite and only station your client listens to ▫Know why they are buying ▫Remind them why they are buying ▫Only talk to them about how this deal will help them!

Identifying & Winning Customers Prof. Stephen Lawrence Deming Center for Entrepreneurship Leeds School of Business University of Colorado Boulder, CO