Amongst poets
Kayaking

3 x 3 = 9x

The diagram comes from John Gourville’s paper, Eager Sellers and Stony Buyers (2006), and is one iteration of what he calls the 9x problem. I’d not come across Gourville’s work until yesterday, when I read Andrew McAfee’s 2006 post, The 9X Email Problem. Andrew’s post is so good, I hope I may be forgiven for reblogging a substantial part of it here:   

A while back I heard John Gourville, a colleague in HBS's Marketing department, talk about his research investigating why so many new consumer products fail to catch on with their intended audiences despite the clear advantages they offer over what's currently on the market.

His explanation was fascinating, and very insightful.  He said that we need to stop thinking about consumers as highly rational evaluators of the old vs. the new products, lining up pros and cons of each in mental tables and then selecting the winner.  Instead, we need to keep in mind three well-documented features of our cognitive 'equipment' for making evaluations.    

  • We make relative evaluations, not absolute ones.  When I'm at a poker table deciding whether to call a bet, I don't think of what my total net worth will be if I win the hand vs. if I lose it.  Instead, I think in relative terms --  whether I'll be 'up' or 'down.'

  • Our reference point is the status quo.  My poker table comparisons are made with respect to where I am at that point in time.  "If I win this hand I'll be up $40; if I lose it I'll be down $10 compared to my current bankroll."  It's only at the end of the night that my horizon broadens enough to see if I'm up or down for the whole game.

  • We are loss averse.  A $50 loss looms larger than a $50 gain.  Loss aversion is virtually universal across people and contexts, and is not much affected by how much wealth one already has.  Ample research has demonstrated that people find that a prospective loss of $x is about two to three times as painful as a prospective gain of $x is pleasurable.   

When combined, these three lead to what the behavioral economist Richard Thaler has called the "endowment effect:"  We value items in our possession more than prospective items that could be in our possession, especially if the prospective item is a proposed substitute.  We mentally compare having the prospective item to giving up what we already have (our 'endowment'), but because we're loss averse giving up what we already have (our reference point) looms large.   

And Gourville points out three factors that make the situation worse for product developers who want their offerings to succeed.  First is timing:  adopters have to give up their endowment immediately, and only get benefits sometime in the future.  Second, these benefits are not certain; the new product might not work as promised.  Third, benefits are usually qualitative, making them difficult to enumerate and compare.   

As if all this weren't enough, Gourville also highlights that the people developing new products are very dissimilar from the products' prospective consumers.  You don't go work for TiVo (to use his example) if you don't 'get' the potential of digital video recorders and think they're a really good idea.  And after working for the company for a while, having TiVo becomes part of your endowment; you think of things in comparison to TiVo, instead of in comparison to a VCR.  Both of these factors make it harder for developers to see things as their target customers do.   

Because of all of the above, Gourville talks about the '9X problem' --  "a mismatch of 9 to 1 between what innovators think consumers want and what consumers actually want."1  The 9X problem goes a long way to explaining the tech industry folk wisdom that to spread like wildfire a new product has to offer a tenfold improvement over what's currently out there.2  …   

Email is virtually everyone's current endowment of collaboration software.  Gourville's research suggests that the average person will underweight the prospective benefits of a replacement technology for it by about a factor of three, and overweight by the same factor everything they're being asked to give up by not using email.   This is the 9X problem developers of new collaboration technologies will have to overcome.   

1Gourville, J. T. (2004). Why consumers don't buy: The psychology of new product adoption, Harvard Business School Note #504-056   

2Andy Grove, Churning things up,  Fortune, July 21, 2003

 

Comments