Salesforce: Why Customers Deviate From Rational Economic Behavior
OREANDA-NEWS. October 14, 2015. The value to buy your product is overwhelming, and yet the customer decides not to buy. Why? The optimism and status quo bias block customers from making the rational choice to buy your product. To help customers see the value of change, sellers can counteract these negative biases by performing a reality check on the customer’s baseline and completing a risk assessment of the status quo.
Counteract the optimism bias with a baseline reality check
Although the value of the seller’s product may be overwhelming, customers discount the seller’s claims for gains because of their optimism bias. This is a well-documented cognitive bias where individuals overestimate their own abilities relative to others. Do you, for instance, feel that you are an above average driver? I know I am, and so did 93% of surveyed US drivers.
Even though only 35% of small American businesses survive in the first five years,81% of entrepreneurs believe their businesses will succeed. So a salesperson should not be surprised when customers say the seller’s product may be great for someone else, but not for them. This is why telling customers your product will improve their results by 30% rarely works, because their inflated baseline prevents them from seeing the potential for change. Instead of selling the upside and having customers discount your claims for gains, the seller should reduce the customer’s inflated baseline so customers can recognize how their results could be improved.
Counteract the status quo bias with a risk assessment of the status quo
Although customers may recognize the value of the seller’s product, these potential gains are unfairly overshadowed by the anticipated losses for change. The status quo bias will cause customers to use the status quo as the reference point to evaluate the attractiveness of the seller’s product. From this perspective, any improvement is a gain and any shortcoming is a loss. But customers are not fair in the way they weigh gains and losses for change, because the “loss aversion” theory causes them to give too much weight to losses. Customers, for example, feel the pain of loss two to three times more than they ascribe to the pleasure of gain. Hence, the anticipated loss on changing from the status quo unfairly overshadows the potential gain from buying the seller’s product. In 2002, Daniel Kahneman won the Nobel Prize in economics for his work on loss aversion. This concept helps explain why customers deviate from rational economic behavior. In a survey of 1500 customers of Pacific Gas & Electric, for example, customers demanded three to four times more compensation to avoid a power outage (loss) than they were willing to pay to avoid the problem (gain). Clearly, loss aversion favors stability over change.
Not only does the status quo bias unfairly overweight the losses for change, but more important, it ignores the opportunity cost for staying the same. Because customers make the status quo the reference point, they automatically complete a risk assessment for change, but they neglect to do a risk assessment for the status quo.
Although customers omit the risks of the status quo, the potential risks of change are real and include such factors as implementation risk, ramp up time learning a new product, career risk if the product fails, financial risk if the ROI isn’t achieved, risk of being misled, and risk of being exposed for not doing their job properly. Sellers can’t argue around these negatives. Sellers can, however, counteract the risk of change by helping customers to do a risk assessment for the status quo. Once the risk of the status quote is greater than the risk of change, customers will realize that they are no longer ankle deep in problems, but they are actually out in the middle of the lake drowning in problems. This is when customers are ready to appreciate the value of being rescued by the seller’s product.
Counteract the confirmation bias with insightful third party research or customer scenarios
Because of these biases, customers not only neglect to assess the risk of the status quo, but they also inflate their baseline. This creates pockets of unrecognized value for change customers do not see. Those pockets provide the opportunity for sellers to shine the light of insight on unrecognized value for the seller’s product. But showing customers how they are not operating optimally in the status quo is a difficult message to deliver without getting a black eye and bloody nose. To protect their self-esteem and guard themselves from the risk of change, the buyer’s confirmation bias motivates them to select evidence in favor of the status quo and ignore or reject evidence supporting change.
From the perspective of the seller, the buyer’s confirmation bias feels as though customers have built a wall around themselves to protect the status quo. So instead of sellers trying to force their insights through the buyer’s defensive wall, sellers should use respected third-party research, because it’s objective. When sellers add insight to the research by showing how the status quo hinders the customer’s performance, the customer doesn’t feel personally attacked.
When quality research is not available, customer scenarios can deliver effective insight. Because the stories are about someone else, they are nonthreatening. Without feeling attacked, customers can now relax and listen to the scenario. If the scenario is insightful enough, customers may start to tell themselves a new story where new choices make more sense. Provocative questions can deliver insight. However, they are more effective if the customer is first primed with a scenario, because the customer will then be providing answers from a realistic baseline.
So, sellers have two tools to counteract the optimism and status quo bias: 1) perform a reality check on the customer’s baseline, and; 2) complete a risk assessment on the status quo. Sellers can use these tools to create value because customers are not going to imagine the heaven if they buy your product (“Why us?”) until they understand the hell if they don’t (“Why change?”). As sellers increase the contrast between the before and after picture of owning their product, they increase the value of their product and thereby reduce the number of deals lost to no decision. As 42% of B2B sales opportunities end in no decision, reducing the number of deals lost to the status quo will provide your sales-force with the greatest leverage for improved results, because your biggest competitor is not another company-- it’s the status quo.