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. —
Habits 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 habit-forming businesses 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 habit-forming businesses 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.” Habit-forming businesses are therefore highly motivated to hook customers – and keep them using their products for as long as possible.
Nir’s Note: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.
Top Consumer Psychology Articles
- The New Norms of Business: Interview with Nathalie Nahai
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- Why ‘Assistant-As-App’ Might Be the Next Big Tech Trend
- People Don’t Want Something Truly New, They Want the Familiar Done Differently.
- 4 Ways to Win Your Competitor’s Customer Habits (Slides)
- Here’s Why You’ll Hate the Apple Watch (and the Important Business Lesson You Need to Know)
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- Building Community Starts with Understanding People
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- Mastering Pricing Principles
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- The Limits of Loyalty: When Habits Change, You’re Toast
- Dual Process Theory: Is Your Product the Elephant or the Rider?
- 4 Ways to Use Psychology to Win Your Competition’s Customers
- Web Psychology – The Science of Online Persuasion
- Developing User Empathy with Design Sprints
- The Real Reason “Stupid” Startups Raise So Much Money
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- The Psychology Behind Why We Can’t Stop Messaging
- How to Do Effective User Research
- Context Driven Design (The “Context Effect”)
- The Psychology of a Billion-Dollar Enterprise App: Why is Slack so Habit-Forming?
- Writing Copy for Your Reader’s Brain
- Designing Habit-Forming Products
- Framing Reward is as Important as Reward Itself
- Games, Play, and Motivation
- How Scarcity & Impatience Drive Irrational User Behavior
- Should You Listen To Your Users or Your Data?
- Emotional Engagement – Designing with the Heart in Mind
- A Free Course on User Behavior
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- Product Psychology: The 3 Things Everyone Should Know About
- Getting Traction: How to Hook New Users
- Designing for Behavior Change Book Review
- The Sneaky Trick Behind the Explosive Growth of the Kardashian Game
- How Successful Companies Design for Users’ Multi-Device Lives
- The Link Between Habits and User Satisfaction
- What Triggers The Best Word of Mouth Marketing?
- What Tech Companies Can Learn from Rehab
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- Teach or Hook? What’s the Real Goal of Online Education?
- Using Mind Control to Raise Startup Cash
- How To Build Habits In A Multi-Device World
- How To Cope with Your Insane Jealousy Of The WhatsApp Deal
- Why Do Fads Fade? The Inevitable Death Of Flappy Bird
- You’d Be Surprised By What Really Motivates Users
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- How You Can Help Users Change Habits
- Is “Lean Startup” Right for Your Idea?
- Hunting for Habits: Keying in on smart design to make a product irresistible
- Are Companies Too Obsessed With Growth? How to Measure Habits
- Refresh: The App a Secret Agent Would Love
- Angel or Devil: Who’s Really Investing In Your Start-Up?
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- 4 Simple Things I Did to Control My Bad Tech Habits
- “Yes, And”: The Two Words that Created a #1 App
- From Laid to Paid: How Tinder Set Fire to Online Dating
- What if In-App Purchases Came to Real Life?
- Hooking Users One Snapchat at a Time
- How To Save Your Startup From The “Spotlight Effect”
- Bible App: Getting 100 Million Downloads is More Psychology Than Miracles
- How to Boost Desire Using the Psychology of Scarcity
- Marketplaces & The Curse of the Network Effect
- Today’s Behaviors, Tomorrow’s Startups
- Venture Capital and The Superstitious Investor
- The Future is Driven by Interface Changes
- Why Business is Addicted to Habits
- Viral Loops Or Viral ‘Oops’?
- Making a Marketplace
- What Killed Turntable.fm?
- What You Don’t Know About Human Intuition Can Hurt You
- Designing to Reward our Tribal Sides
- New Video – “Hooked: Building Habit-Forming Products”
- How Technology is Like Bug Sex
- Ways To Get People To Do Things They Don’t Want To Do
- The Network Effect Isn’t Good Enough
- Mass Persuasion, One User At A Time
- How Investment Drives Engagement (Slides)
- Getting Your Product Into the Habit Zone
- Where Have The Users Gone?
- Infinite Scroll: The Web’s Slot Machine
- Designing User Habits Video
- Psychology of Sports: How Sports Infect Your Brain
- This is Your Brain On Boarding: How to Turn Visitors Into Users
- User Investment: Make Your Users Do the Work
- Behavior by Design Video
- When Designing for Good Is Bad
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- The Next Secrets of the Internet
- User Growth and Engagement: A Hacker Metric
- Spotting the Next Facebook: Why Emotions are Big Business
- The Billion Dollar Mind Trick: An Intro to Triggers
- Why Everyone Hates I.T. People
- Hooking Users In 3 Steps: An Intro to Habit Testing
- Abolish The Reference Check
- Variable Rewards: Want To Hook Users? Drive Them Crazy
- How to Design Behavior (The Behavior Change Matrix)
- How To Design For “Normals”
- The Hook Model: How to Manufacture Desire in 4 Steps
- User Habits: Why Startups Must Be Behavior Experts
- What Is, and Is Not, Your Product’s Job
- Pinterest’s Obvious Secret
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