Nir’s Note: This post is a little different from my normal writing. For one, its much shorter. You’ll notice I provide fewer citations and the ideas are less developed than my previous essays. This is intentional and I need your help. I’m considering writing a chapter on this topic in a forthcoming book but wanted to test the ideas with my most loyal readers first. Give it a quick read and tell me what you think. 

122822729_30044f0418Habits are good for business. In fact, many industries could not survive without them. The incentive systems and business models of the companies that make habit-forming products require someone gets hooked. Without consumer habits, these enterprises would go bust.

While most of us think of cigarettes or gambling as habit-forming products, the fact is, a much wider swath of industries rely on consumer’s using their products without thought or deliberation.

These companies have no secret agenda or nefarious ambitions. They are in business to give people what they want, even if at times, what the consumer wants isn’t necessarily good for them.

But like every other company, habit-forming businesses are run by well-intentioned people. Hard-working folks with families and dreams of their own. So how then can these two realities coexist? How can companies seek to hook their customers, while also being run by decent people who have just as visceral of an aversion to manipulation as the rest of us?

The Habit Business

The answer lies in the business imperative. An enterprises’ worth is the sum of the future profits it will generate. MBAs are taught to calculate the value of an enterprise this way and it is the benchmark investors use to determine the fair price of a company’s shares.

CEOs and their management teams are evaluated by their ability to increase the value of their stock. Their job is to implement strategies to grow future cash flow by some combination of increasing revenues and decreasing expenses.

Creating consumer habits is an effective way to drive share price by increasing what companies call “customer lifetime value.” CLTV is the amount of money made from a customer before they switch to a competitor, stop using the product, or die.

Some products have a very high CLTV. Credit card customers for example, tend to stay loyal for a very long time and are worth a bundle.

Someone Must Get Hooked

Acquiring customers is expensive and time consuming. Ensuring customers are habituated to using a product decreases these expenses, thereby increasing enterprise value.

It’s worth noting that a surprising number of businesses follow a negative binomial distribution, also known as a Pareto concentration. Typically thought of as the 80/20 rule, the phenomenon occurs wherever a few buyers account for the vast majority of revenue. However, at times that split can be much more skewed than one might think.

While for most consumer goods, the concentration tends to be 60/20, for online gaming companies like Zynga, 100% of the revenue comes from just 2% of players.

In most consumer-facing businesses the Pareto Law applies. These customers are obviously very important to the company because without them, the enterprise could not survive, their profit margins simply would not allow it.

The combination of a business imperative to drive shareholder value by increasing CLTV along with the identification of the most loyal customers, means companies spend significant resources competing for a small set of “heavy users.” Companies are therefore highly motivated to hook customers – and keep them using their products for as long as possible.

Nir’s Note: Let me know what you think in the comments section below or send me an email. Do you have any supporting stories to share? Do you know of any relevant studies or examples? Read any good books on the topic? Please let me know. 

Photo Credit: som3rsault via Compfight cc

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  • http://twitter.com/michaeljworley Michael Worley

    For many companies the ‘hook’ is created at a loss and they only profit in long term engagement through the additional and ongoing services. Contract Phones come particularly to mind. Sometimes this has a negative financial weighting and the company has to effectively ‘cull’ them from the services by offering paltry or non existent upgrade options (worse than a new customer) that seem nothing but repugnant. The buyer not being aware of the reasoning behind this ends up with a very poor view of the company. As they are likely to stay the same calibre of user with regards to the profitable services they will no doubt have a negative CLTV with any company they go to after (and after that). For example, a tech enthusiast wanting a high end smartphone each time they upgrade (which is a ‘hook with a large upfront investment) that doesn’t make the calls where money is made (other networks, abroad etc). They are bound to repeat ‘offend’ so to speak with every company they go to, causing an obfuscated outlook that seems completely justifiable as they don’t know any better and never will.

    Just a bit of insight from previous employment.

    • http://www.nirandfar.com/ Nir Eyal

      Sounds like you’ve learned from the inside. Thanks for commenting Michael.

  • http://twitter.com/fabianszulanski Fabian Szulanski

    I believe that not only customers should be hooked, but the business’ value network as a whole, aiming to increase and sustain NLTV – Network lifetime value through triggering and helping generate habits of interaction – in all nodes- with the network’s value proposition. Easy? Of course not. But necessary.

  • http://twitter.com/NickyChips Nik Souris

    In my experience and study, the key to developing that habit forming consumption or use comes through the creation of an emotional moment that is stimulated from a user’s senses – touch, sight, smell, taste, sound. The challenge that brands have (and it’s becoming a social issue in several cases) is that they need to keep those customers alive and functioning to realize that lifetime value. I recently saw an online commercial for CocaCola (getting beaten publicly by the Obesity issues) where it makes the chairs that people sit the evil-doers in society getting fat. Unfortunately, most companies don’t have the resources to figure out the optimal level of habitual use and IF they find the product with that addictive trait and just serve it until they have to find a replacement.

  • http://twitter.com/TravisWWWebb Travis Webb

    Great topic! One thing I think about a lot: should companies with the pareto concertration focus more on trying to get the small # of heavy users to use even more? or on trying to get the large # of infrequent users to become more frequent purchasers? what’s the best way to think about this tradeoff if you assume limited marketing resources?

  • http://twitter.com/bradm262run Brad Mumbrue

    The addiction to habits can be dangerous; beware the Innovator’s Dilemma. Today’s rigorous customer segmentation can result in filter bubbles and a risky loop that confirms a company’s bias for its “best, most profitable, loyal” customers. The long-term profits and life time values look great in traditional financial models fabricated with internal data. But these can blind companies to new opportunities built around market knowledge and customer understanding. Fabian makes a great point below on value networks; generating habits of interaction. A company has to do more than examine what its numbers say. Truly valuable organizations, the strongest, sustainable businesses, understand why their customers seek them out and continually develop the meaning behind the “why”.

  • http://ponga.com/ Barbara Tien

    You asked for feedback, and as a loyal and habituated reader, I feel compelled to respond (;-b)

    Preamble: I can appreciate your need for a simpler piece to introduce your habit concepts to new readers. This one, to my mind, is a tad thin compared to your others — but then, I’m not completely clear on your audience and goals, so that could be exactly what you’re looking for.

    To the details:
    In the section “someone must get hooked” you talk about the Pareto concentration, then use the example of consumer goods … tends to be 60/20… do you mean 60/40? Then you compare that to gaming, 98/2, interesting.

    As a reader right there I’m looking for you to fill in why there is a difference in the concentration between consumer goods and gaming. (I can guess, but I’m interested in your considered perspective.)

    The next statement is confusing to me: “In most consumer-facing businesses… would not allow it.” Since you’ve just said most companies are 80/20, some consumer are 60/40 though some gaming might be 98/2 then… huh? Yeah, ya gotta have customers to make money, I knew that.

    I’m expecting a little deeper analysis of how the CLTV needs to map to not only the Pareto concentration of buyers among users but also to the product segment, or something. It’s close, I can taste it, but I’m not getting the tight package I’ve come to expect in your pieces.

    Is that helpful?

    • http://www.nirandfar.com/ Nir Eyal

      Very helpful Barbara thanks! I will make this point clearer in the next version. Much appreciated.

  • James

    This will be great and I’m likely to buy whatever book it’s contained in if you flesh it out a lot more and use tons and tons of real examples.

  • nipulpatel

    Nir, fantastic blog. Really enjoy your writing. I do not comment very often but want to become a more active member of this community. Hopefully, that’s a positive addition.

    “seeking to hook customers” doesn’t have to imply manipulation in a negative context (is there any other context when talking about customers?). Some habits are good for people (brushing your teeth!). When businesses help us build healthy habits through their hook, the seemingly contradictory realities do coexist. Some examples that immediately comes to mind are engaging to-do list apps or fitness tracking apps. They influence positive behavior changes and make us more productive and healthier.

    In just reading the title, one might think that the article is about forming habits in business (e.g., discipline in customer engagement). For me, that would be an equally interesting topic. Habits for business operations make them more reliable for customers, which has an impact on the “business imperative” that you discuss in your post.

  • Jessica Brown

    Hi, I am thinking a lot at the moment about how ‘good’ people can do morally objectionable things. So far I have come up with two different explanations. Firstly as a society we are conditioned to think of ourselves and our immediate family and their well being and not of others (after all shouldn’t they be looking after themselves?) Secondly, I believe that people act according to the expectations of their role or title and so if your role is to manipulate consumers then that is what you will do. Also because it is your role, you don’t have to feel bad about it.

  • http://www.facebook.com/haydensaunders Hayden Saunders

    Hi Nir. Your point that businesses like habit forming products because they make money is interesting – the stats on repeat customer ratio in different verticals is really fascinating and I’d be interested in your research and hypotheses to explain the differences.

    Addressing why people work at companies that produce harmful habit-forming products feels like a different topic though, worth separating.

    I’d speculate that a spectrum exists – some people don’t accept their products are harmful, some believe that what their customers want trumps all else, and others do it for the money and accept the harmful consequences of their actions. You should interview this guy – former Philip Morris exec – http://www.vice.com/read/i-was-a-corporate-tobacco-peddler

    • http://www.nirandfar.com/ Nir Eyal

      Can you post a link to the repeat customer ratio data you mentioned Hayden? Do you have any insights into the differences?

      • http://www.facebook.com/haydensaunders Hayden Saunders

        I was actually referring to the stats you quoted in your post – CPG vs Zynga.

        As for the differences – perhaps the effort & cost required by the consumer to try a product is important. To try a new cereal product for example, requires you visit a supermarket, spend some money, and miss out on your regular favourite cereal that week. Adds up to quite a high “cost”. In contrast, the effort required to try a Zynga game in your news feed is nominal. So Zynga achieve a much a higher acquisition rate but consequently also a much higher churn rate, resulting in stats like 2% of customers generating 98% of revenue.

  • http://twitter.com/alirtariq ARTariq

    Thanks for sharing your thoughts with us – especially those which you are still fleshing out and mulling over. It takes guts to do that; a hallmark of a true continuous builder.

    “… habit-forming businesses are run by well-intentioned people. … So how then can these two realities coexist?” I do feel there is a bit of a false dichotomy here, as some other commenters have mentioned. There is an implied negative connotation to habit-formation in your piece, whether it’s intentional or not, and I think it’s distracting us from your main point. Of course, not all habits are bad, and yes, no one likes being manipulated.

    The basic premise seems to be the following: it costs a lot for a business to acquire customers and sustain itself; there are usually only a small group of paying customers; these paying customers need to be given an incentive to come back and pay for more in order to offset the costs; thus, habituate them to use the business’ products/services.

    In and of itself, this is not terribly profound. Indeed, many business students would blandly answer the question of “why does a company need repeat customers?” with “Because it needs to make money!”

    I think more interesting than WHY companies need to hook their customers is the HOW and why that mechanism works. Why is it that people (admittedly biased heavily towards the developed countries) continuously buy, use, and even PINE for products that are only slightly and incrementally changing, ala iPhone, Facebook, Call of Duty, etc.? Have we as a species reached a point where our consumerist nature has far exceeded our desire to fulfil basic needs? Are we plateauing on the grand scheme of our innovation frontiers? Has the hyper-availability of technology and information dulled our senses, causing us to get easily ‘bored’ with the old and used? These types of questions, and their implications to us as business leaders and change agents, is far more interesting to me.

    Hope that helps!

    • http://www.nirandfar.com/ Nir Eyal

      Insightful questions ARTariq, many of which I will address in future posts (and will expect to see your comments!)

  • http://en-gb.facebook.com/people/Nic-Brisbourne/608641437 Nic Brisbourne

    Hi Nir – I agree with your thesis, but I would add an explanation of the mechanism by which good people go bad. Invectives are part of it, but the way that small decisions that are individually insignificant add up and breed cynicism in the decider is also interesting. It’s also true, if course that lots of people simply don’t care.

    It might also be worth mentioning that people are increasingly stepping away from bad habits.

    • http://www.nirandfar.com/ Nir Eyal

      Nic – Where’s the evidence that “people are increasingly stepping away from bad habits”?

  • Guest

    This is of course a fascinating topic.

    It’s difficult to talk about habit without first considering where it falls in the spectrum of the company-customer relationship. My conceptualization is that there is a sort of ladder in a customer’s relationship with a vendor, on which Habit is a very high rung.

    Awareness > Interest > Conversion > Engagement > [Habit] > Loyalty.

    If I were drawing this out, I would collect the final three rungs (Engagement – Habit – Loyalty) into a single bucket of ‘retention’. I put ‘habit’ in brackets because it may most frequently not apply.

    Aside from the less savory habit-formers of porn, tobacco, alcohol (which, anyway, I would argue are more generally ‘addictions’ than ‘habits’. It’s worth exploring the line between them; I think your mention of them doesn’t acknowledge the difference.) – there are lots of additional habitual activities that reside in this ‘loyalty’ space, as you mention.

    Consider the New York Times.
    Awareness: I grew up in a house where my parents got the paper
    Interest: I graduated college and considered subscribing
    Conversion: I subscribed
    Engagement: I wrote a letter to the editor (old-school), became a facebook fan (new-school)
    Habit: Reading the paper becomes a part of my morning routine, I can’t imagine doing it differently.
    Loyalty: Even when I hear about a new, edgy paper coming out, I remain loyal to the NYT because it’s part of my life and identity.

    [I can see someone making the argument to transpose the last two rungs, but that’s for another discussion].

    Now, to focus in on Habit…

    I wonder if we can get a little more specific in our understanding of habits. Let’s define it as “a routine that one engages in with some frequency, that one finds difficult to give up”.

    The key, as you note, for a business is to find a way into its customers ‘habit zone’. I’m not sure every business can. There’s a difference between being loyal to a brand or top of mind (eg – “I need new shoes, I better go to Zappos”) and forming a habit (eg – “Every morning I order the same Starbucks coffee” “On weekends I peruse the aisles of Barnes and Noble”). In order to offer a habit-forming opportunity, the user needs a reason to come back to it time and again.

    Habits have to satisfy a curiosity (I wonder what’s new on Pinterest), scratch an itch (I need my morning jog or I go stir-crazy), make life easier (leaving my dirty dishes in the sink after eating), etc — that’s why they’re hard to give up.

    There is an alternate way for business to think about the road to Loyalty: identification. To use the tired Prius example, people drive Priuses (Priii?) not because of a habit, but because they want to be seen as the kind of person who drives a Prius. Apple, Whole Foods, Microbreweries, fashion lines, gun manufacturers all win when they get their customer to see their products as a signifier of who they are, rather than a habit they engage in.

    Questions for further consideration:
    – Are we set on a clear definition of habit?
    – Is there always an opportunity for businesses to invite habits, if we are just creative enough?
    – What is the line between loyalty, habit and addiction?
    – Is there a ‘better’ or ‘worse’ option between habit and identification, or are they simply two separate, perhaps intersecting paths?

  • http://www.facebook.com/shaidavis Shai Davis

    This is of course a fascinating topic.

    It’s difficult to talk about habit without first considering where it falls in the spectrum of the company-customer relationship. My conceptualization is that there is a sort of ladder in a customer’s relationship with a vendor, on which Habit is a very high rung.

    Awareness > Interest > Conversion > Engagement > [Habit] > Loyalty.

    If I were drawing this out, I would collect the final three rungs (Engagement – Habit – Loyalty) into a single bucket of ‘retention’. I put ‘habit’ in brackets because it may most frequently not apply.

    Aside from the less savory habit-formers of porn, tobacco, alcohol (which, anyway, I would argue are more generally ‘addictions’ than ‘habits’. It’s worth exploring the line between them; I think your mention of them doesn’t acknowledge the difference.) – there are lots of additional habitual activities that reside in this ‘loyalty’ space, as you mention.

    Consider the New York Times.
    Awareness: I grew up in a house where my parents got the paper
    Interest: I graduated college and considered subscribing
    Conversion: I subscribed
    Engagement: I wrote a letter to the editor (old-school), became a facebook fan (new-school)
    Habit: Reading the paper becomes a part of my morning routine, I can’t imagine doing it differently.
    Loyalty: Even when I hear about a new, edgy paper coming out, I remain loyal to the NYT because it’s part of my life and identity.

    [I can see someone making the argument to transpose the last two rungs, but that’s for another discussion].

    Now, to focus in on Habit…

    I wonder if we can get a little more specific in our understanding of habits. Let’s define it as “a routine that one engages in with some frequency, that one finds difficult to give up”.

    The key, as you note, for a business is to find a way into its customers ‘habit zone’. I’m not sure every business can. There’s a difference between being loyal to a brand or top of mind (eg – “I need new shoes, I better go to Zappos”) and forming a habit (eg – “Every morning I order the same Starbucks coffee” “On weekends I peruse the aisles of Barnes and Noble”). In order to offer a habit-forming opportunity, the user needs a reason to come back to it time and again.

    Habits have to satisfy a curiosity (I wonder what’s new on Pinterest), scratch an itch (I need my morning jog or I go stir-crazy), make life easier (leaving my dirty dishes in the sink after eating), etc — that’s why they’re hard to give up.

    There is an alternate way for business to think about the road to Loyalty: identification. To use the tired Prius example, people drive Priuses (Priii?) not because of a habit, but because they want to be seen as the kind of person who drives a Prius. Apple, Whole Foods, Microbreweries, fashion lines, gun manufacturers all win when they get their customer to see their products as a signifier of who they are, rather than a habit they engage in.

    Questions for further consideration:
    – Are we set on a clear definition of habit?
    – Is there always an opportunity for businesses to invite habits, if we are just creative enough?
    – What is the line between loyalty, habit and addiction?
    – Is there a ‘better’ or ‘worse’ option between habit and identification, or are they simply two separate, perhaps intersecting paths?

    • http://www.nirandfar.com/ Nir Eyal

      Thanks for the thoughtful comments. I’ll certainly explore these questions in future posts.

  • http://tdp.me/ Jay Shirley

    The latter half of that book falls off pretty quickly, especially when talking about gamblers and Duhigg should have focused more on what the casinos do to balance responsibility and the hooks.

    As it stood, he missed a big opportunity in the end of the book to present something really relevant to the discussion here.

    Nir, have you thought about contacting people in the gambling industry for contacts? It’s a regulated industry with “Do not call” lists for gamblers wishing to break free from the habit. As a Las Vegas resident, I encounter a lot of people who work in the gaming industry and even at the lower level in the foodchain talk about the habits and “getting people in the door”.

    • http://www.facebook.com/shaidavis Shai Davis

      I think it’s important to continue to differentiate habits from addictions. Although there are similar results happening between the two, I wonder if they aren’t altogether two separate processes happening in the brain. I’d be skeptical to learn from one and apply it to the other. I’m sure a neuroscientist would have additional thoughts on this.

    • http://www.nirandfar.com/ Nir Eyal

      Nathasha Dow Shull’s book “Addiction by Design” does an amazing job of profiling the tactics used in machine gambling.

  • http://twitter.com/johnxkenny john kenny

    You raise a great topic. Good businesses should developing almost unconscious habits among their customers, but this raises both regulatory and ethical issues: isn’t the free market based on freely made decisions? Why should brands act ethically?

    As a marketing, I see it from the perspective of branding and the insight that you can’t fool all of the people all of the time. I do many things habitually, some of which I come to like, some of which I regret. Part of the reason why brands like Nike, Apple and Spotify work so well is that the habits they develop aren’t just enjoyable, but make me a better person over time. The reason why brands like McDonalds, Comcast and Capital One are so reviled, is that they create habits I regret, benefiting from my weaknesses of will, making me worse off over time.

    From a long term branding/business value perspective, the habits we develop need to make our customers lives better, better then they could of imagined. Otherwise our brand value will be depleted and marketers will face demands for more regulatory oversight.

    • http://www.nirandfar.com/ Nir Eyal

      I like this distinction John: habits that “make me a better person over time” versus “habits I regret … making me worse off over time.”

      • Brittany Fritsch

        I agree. I also like this distinction and think it is important.

        Irrational Labs might be helpful in piecing out this definition a bit more: http://irrationallabs.org/about/

        Their purposes is to help companies provide value to customers by creating habits for good and of course reap business value for themselves in return.

  • tkutnick

    Hi Nir,

    No specific case studies for you, but I know Zappos and Amazon are two companies that instantly come to mind when talking about CLTV. In “Delivering Happiness” (the Zappos book) there’s a pivotal moment when Tony Hsieh stops trying to acquire new customers and instead pursues creating a “WOW” experience for the customers they do have. Zappos’ incredibly generous customer service is a core part of their CLTV strategy I believe.

    Also, in reading some articles on Amazon’s purchase of Goodreads, it seemed like Amazon was simply purchasing access to the 20% of readers that generate most of the revenue in the book industry. Might be something worth looking into.

    Hope that helps.

    -Tim

  • http://twitter.com/ahikoron Ahik Oron

    Another book to look at is Jeremy Dean’s

    Making Habits, Breaking Habits: Why We Do Things, Why We Don’t, and How to Make Any Change Stick

    http://amzn.to/13jo69b

  • http://www.nirandfar.com/ Nir Eyal

    Great points Kunal! Thank you.