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Why invest in habit-forming products (1/3) – Risk

Old (and indeed new) habits die hard. Most of us know this old adage by heart. And it’s the main reason why habit-forming products are so popular – with both consumers and investors alike.

But, as an investor, how do you tell a habit-forming product from a flash in the pan? It’s a tricky business. That’s why I’ll try to unravel the myths, truths and mysteries in a three-part blog series, starting today.

Why invest in habit-forming products (1/3) – Risk

It’s certainly true that a business has a much better chance of succeeding when their customers really need (or want – but to a lesser extent than need) their product or service. And making a habit out of it works wonders!

But, even though the ideas behind habit-forming products or services are not new, they may still sound like an edgy buzzword to many. The truth is that they are much more than that. I mean, we are all aware of the risky nature of investments. Investors worldwide are part of an everlasting effort to mitigate investment risks. And I think we can all agree that an investment’s success is highly dependent on the end-users’ behavior.

Make it a habit to invest in, er, habit-forming products

Cognitive behavior science tells us that habits are behaviors done with little or no conscious thought. Concur! But how can a product champion this notion? How can we? And why do we need it?

Let’s say you’re looking to invest in a company that produces a software product for daily use. If they can get their targeted audience to habitually use the software daily, they can actually gain a great competitive advantage over similar products. All they would need to do at this point is to find out what makes for a habit-forming product.

If you’re in the software business, it’s not that hard to find out. Taking a step back will help you see through all the data you and everyone else have gathered over the years. Evidently, it seems that the way everyone gains access to various types of data and the speed in which it all happens, has a lot to do with it. Or the convergence of them, thereof. This is not merely what helps a product form a habit. It’s also what makes the world a more habit-forming place to live in, every waking day. Since smartphones, at least.

Angel investors can help

Angel investors like to give back to the community in more than one way. Some of them, as have we at Starttech Ventures, will create their own incubation or acceleration programmes, in an effort to help their portfolio companies grow and scale. If they are seasoned entrepreneurs themselves, this is also an excellent way to mitigate risk.

Suppose you’re incubating a concept for mobile service that has the potential to greatly reduce or eliminate a user’s problem. The trick is to design an experience that will resolve the user’s problem frequently enough to form a habit. While this is not a critical component to success for every business, it can really be a one-way ticket for some of them. For example, Instagram might not have succeeded were it not for its habit-forming qualities. This is a point to think through before you come on board with a new great idea.

What’s in it anyway?

I can almost hear you say: “I’m an investor, not a scientist! Just tell me what to look for.” You’re absolutely right, of course!

Suppose the company you’re investing in is developing a way to facilitate technical support employee training at a very specific level. One which is needed daily, increasing their expertise, reducing response time towards customers and increasing productivity exponentially. All this, through a mobile app. Based on this example, here’s what you should look for:

  • Would there be a daily circumstance that would make them fire up the app on their phones? Could this happen more than once a day?
  • Can the app help them actually resolve their problem at first attempt? If so, they can act upon it. If not, they may lose interest.
  • Have they gained something by using the app, versus not using it? Have they learnt something? Have they saved time? Were they spared a headache? Even a reward system with points that their manager can occasionally look at, might be rewarding enough.
  • Do they have any part on improving how the app works? If they input data, does it create new possibilities for them? If they put in time using the app, do they get something out of it? For example, if the app would use their behaviors to produce behavioral search results according to subjects of interest, thus saving search time, this would indeed be something to write home about.

How can you check the boxes?

Users must be persuaded to use the app, in the first place. Otherwise, however well-made and useful, it will not take off. How do you, as an investor, get a hint of whether this is the case?

According to the Fogg Behaviour Model, a Behaviour may occur by Motivation to act, Ability to act and by the existence of the right Trigger, which will prompt one to act. In shorthand writing:

B = MAT (Behaviour = Motivation Ability Trigger)

By Goodmanguy (Own work)
[CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)],
via Wikimedia Commons

Here’s the catch. If one or more of the elements on the right side of the equation is missing, the behavior will not occur. If you can provide all three elements at the same time, you’re on the right track. You should also try to strike the right balance, too! Even if the Trigger is there and the Motivation is satisfactory, an iffy Ability level may set you up for failure. So, try to have just enough of everything.

When does it work?

Well, not always. Habits, or habitual behaviors in products, may start as a so called “vitamin”. A nice-to-have. Once a user has invested time and data to the product, it gradually transforms into a “pain-killer”. It is no longer a nice-to-have. It is now a must-have. This is when it gets a little tricky on ethics.

The most important thing, to begin with, is to be sure you indeed have a habit-forming product. Keep in mind that a habit is well defined only when a behaviour occurs with enough frequency and perceived utility. Then, you can polish up your approach according to ethics. Just make sure you don’t omit this step.

Risk mitigation on steroids

Risk mitigation is actually the reason why we need to invest in habit-forming products. Investing in habit-forming products that can control the circumstances under which desired behaviors may occur, come with several business benefits.

  • A more dedicated user will provide you with a higher customer lifetime value
  • A successful product or service that actually uses your customers to advertise itself, will give you supercharged growth
  • You will also have greater flexibility when shaping your next pricing model. That’s because people shall be more willing to pay more in exchange for a really helpful and useful product than they would for “just another-product”
  • An edge over competition may apply. Or may not. If your team can make sure that the competitive advantage is impossible to reproduce or very difficult to do so, you’re in business. This will give you some much appreciated longevity, essentially earning you a much greater chance for that tenfold ROI you were hoping for.

So, what about ethics?

You must have realised by now, a habit is a controversial beast. As an investor, it is important to demonstrate a considerable track record. But, don’t do it at the expense of your reputation as a professional, or an individual. It could cost you your network.

In other words, habit-forming is a form of manipulation. It’s a super power. Your team should benefit from its results, as long as they make sure they are building healthy habits. Not addictions.

Get in the zone

So, how can you validate the assumption that you are indeed investing in habit-forming products? For that, you need to sit down with your teams and, as we do in our long acceleration programme, try to run a few lean loops of Build-Measure-Learn. In this way you’ll find out what you’re looking for. Establish that their product is able to keep users in the habit zone. Ask them questions like:

  • What kind of habits do you need to incorporate to your business model?
  • Which behavior are you trying to convert to a habit?
  • What is the problem people are trying to solve by using your product?
  • In what way do people solve that problem right now and why does it actually need a solution?
  • In what frequency should people engage with your product, for it to be successful?

What’s next?

Investing in habit-forming products may increase your chances of success. And that’s one thing. Knowing whether you indeed have a habit-forming product that invokes certain behaviors is another. There is more to it than meets the eye.

Stay tuned to find out how the steps of habit-forming work, in the second part. This will help you identify a winner product when you see it!

Why invest in habit-forming products (1/3) – Risk was last modified: January 9th, 2020 by Panagiotis Sarantopoulos

Panagiotis Sarantopoulos Panagiotis Sarantopoulos

The Starttech Ventures Head of Content Marketing. Studied Science of Computing at the University of Huddersfield in UK, specialising in Animation for Multimedia Systems. He has worked as a Multimedia Author for IBM Hellas and as an Adobe Certified Instructor and Support Technician for Adobe Systems software at Anodos SA. He has also worked at various Advertising Agencies, as a Web/ActionScript developer.

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