Monday, March 24, 2014

Why Habits are the Lifeblood of Your Business

Editor’s Note: This essay is adapted from Hooked: A Guide to Building Habit Forming Products by Nir Eyal. Nir also blogs at NirAndFar.com.

Habits are one of the ways the brain learns complex behaviors. Habits form when the brain takes a shortcut and stops actively deliberating over what to do next.1 The brain quickly learns to codify behaviors that provide a solution to whatever situation it encounters.

The success of many companies depends on their ability to find a way to get users to go from infrequent use to being dependent on the product. It is at the point when customers start to use it on their own, again and again, without relying on overt calls-to-action such as ads or promotions, that the product becomes a habit.
These habit-forming products change user behavior and create unprompted user engagement.  Habit formation is good for business in several ways. Building for habits increases customer lifetime value, provides pricing flexibility, supercharges growth, and erects competitive barriers.

1. Increasing Customer Lifetime Value

Fostering consumer habits is an effective way to increase the value of a company by driving higher customer lifetime value (CLTV). CLTV is the amount of money made from a customer before she switches to a competitor, stops using the product or dies. User habits increase how long and how frequently customers use a product, resulting in higher CLTV.

Some products have a very high CLTV. For example, credit card customers tend to stay loyal for a very long time and are worth a bundle. Hence, credit card companies are willing to spend a considerable amount of money acquiring new customers. This explains why you receive so many promotional offers, ranging from free gifts to airline bonus miles, to entice you to add another card or upgrade your current one. Your potential CLTV justifies a credit card company’s marketing investment.

2. Providing Pricing Flexibility

Habits give companies greater flexibility to increase prices. For example, in the free-to-play video game business, it is standard practice for game developers to delay asking users to pay money until they have played consistently and habitually.

Once the compulsion to play is in place and the desire to progress in the game increases, converting users into paying customers is much easier. Selling virtual items, extra lives, and special powers is where the real money lies.

As of December 2013, more than 500 million people have downloaded Candy Crush Saga, a game played mostly on mobile devices. The game’s “freemium” model converts some of those users into paying customers, netting the game’s maker nearly a million dollars per day.

3. Supercharging Growth

Users who continually find value in a product are more likely to tell their friends about it. Frequent usage creates more opportunities to encourage people to invite their friends, broadcast content, and share through word-of-mouth.

Products with higher user engagement also have the potential to grow faster than their rivals. Case in point: Facebook leapfrogged its competitors, including MySpace and Friendster, even though it was relatively late to the social networking party. Although its competitors both had healthy growth rates and millions of users by the time Mark Zuckerberg’s fledgling site launched beyond the closed doors of academia, his company came to dominate the industry. Facebook’s success was, in part, a result of the more is more principle — more frequent usage drives more viral growth.

4. Creating Competitive Barriers

When it comes to shaking consumers’ old habits, better products don’t always win — especially if a large number of users have already adopted a competing product. For example, August Dvorak designed a keyboard in 1932 that is far more efficient than the QWERTY most people use today. Dvorak’s design of vowels in the center row proved to increase the speed and efficiency of typists. However, despite having built a better product, the switch to his keyboard never happened. Why? QWERTY survives because the costs of switching user behavior after habits have been formed are too high.  

For many products, forming habits is an imperative for survival. As infinite distractions compete for our attention, companies are learning to master novel tactics to stay relevant in users’ minds. Today, amassing millions of users is no longer good enough. Companies increasingly find that their economic value is a function of the strength of the habits they create. In order to win the loyalty of their users and create a product that’s regularly used, companies must learn not only what compels users to click, but also what makes them tick.

You can hear Nir speak at the upcoming Future of Consumer Intelligence Conference 2014 in Los Angeles, California.  The Future of Consumer Intelligence 2014 explores the emerging role of decision science and the convergence of knowledge points - insights, foresights, social science, marketing science and intelligence with technology as a central driving force and profound connector. For more information on the event, click here to download the interactive brochure: http://bit.ly/1h9MG2Q

Register for FOCI and see Nir in person! http://bit.ly/1eozvcg


1. Dickinson, A. & Balleine, B. (2002) The role of learning in the operation of motivational systems. In Gallistel, C.R. (ed.), Stevens’ Handbook of Experimental Psychology: Learning, Motivation, and Emotion. Wiley and Sons, New York, pp. 497–534.
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