Sometimes sales management gets caught between the fronts of sales and product organizations. According to product development, the new product has better functions than its competitors and is also cheaper. But the sales organization explains that the customers are either not interested in the product or simply do not want to buy it. How does this discrepancy come about and how can we achieve positive buying behavior through better sales management and decision making?
Customers do not make rational decisions.
Many are familiar with the economic principles of supply, demand and benefit. According to the utility theory, the price in the markets is determined by supply and demand, and customers make rational decisions based on the price and characteristics of products and services. Better features and a lower price cause rational customers to switch from a worse product or service to a better one. If the product organization is right in terms of features and price, the sales management and sales staff may not have sufficient skills to complete the sale.
Nobel Prize winners Daniel Kahneman and Amos Tversky developed Prospect Theory in 1979, which challenges traditional decision-making models. Their studies show that decisions are also influenced by emotions. People are risk-averse when it comes to positive decisions and risk-averse when it comes to negative decisions. You want to avoid the feeling of disappointment and regret that comes with making bad decisions.
In both cases, the same statistical expectation exists with regard to the result. For a rational individual it would not make any difference which option is chosen. According to Kahneman, however, most people decide in situation 1 to make a certain profit and in situation 2 they bet on the possibility of not having to accept a loss.
According to the Prospect Theory, individuals behave risk-averse in positive situations and risk-averse in negative situations if the probability of occurrence is high. This also applies to the opposite case, as we can see from the prospect theory table below.
The effect of risk-averse behaviour is 1.5 – 2.5 times higher for most people. In sales management, this means If you offer a customer a newer, cheaper or better product instead of the old one, it has to be twice as good for him to take the risk and replace the old product.
The endowment effect, the fear of change and disappointment, has an impact on sales activity
Richard Thaler’s research in 1980 revealed that people are reluctant to forego products and services they have purchased for personal use. This applies in particular to service products such as tickets or the sale of their own home. People who have purchased tickets for an event do not usually want to pass them on at the same price as they bought them. Rather, you would like to get more money for the tickets after the purchase.
Products and services to which the customer has a relationship are therefore difficult to replace. There are a number of such products and services in both B2C and B2B markets. Few customers change banks and even professional advertising agencies or IT software companies build relationships with their customers. The customer is reluctant to forego such products and services if a new player makes a better offer.
Research has also shown that people who are reluctant to trade old products or services for new ones are willing to spend more time and effort defending the status quo than those who are committed to change. According to Kahneman, these efforts can be five times higher among people who resist a cause than among proponents. If in a family of four only one is opposed to flying to Greece on holiday rather than to the Canary Islands, the Canary Islands are very likely to be retained as a holiday destination.
We are seeing the same situation in corporate sales. The more people are involved in the decision-making process, the more likely it is that one will reject the change. Then the transaction does not take place and the status quo remains.
One of the main reasons why people act risk-averse is the way people feel disappointment and regret
Based on the Prospect Theory it is possible to calculate the effect on the customer’s decisions. When there is disagreement between sales and product organisation, the most important question is whether the characteristics of the product and the lower price are sufficient to induce the customer to switch from one product to another. Kahneman and Tversky have developed a model (table below) that shows how people weight probabilities in their decisions compared to statistical probability.
The seller benefits from a situation where the customer has a need and the profit is not probable but significant. Thus, any improvement in the current situation is perceived more clearly than it actually is. This is the case, for example, if the customer does not yet have the products or services he needs. It becomes difficult if the customer’s need is already met and the newly offered products or services are only slightly better than the existing ones. In this situation, the customer will behave risk-averse.
The Kahneman table can be used in many different ways. Let’s look at a case where customers are willing to test a new crossing instead of the traditional taxi service in Helsinki. Let us assume that the decision is based on the quality of the journey and the price paid for it. The quality of the ride is a subjective factor, where the customers are rather insecure. Therefore, we could assume that customers behave according to the Prospect Theory.
According to the calculation, a more interesting option would be for a 15 kilometre trip if the quality or customer experience is at least 90% of the regular taxi service. The customer experience of quality is influenced at least by the availability of the trips, the reliability of the service delivery, the quality of the vehicle and the service knowledge of the driver.
From Uber’s point of view, it is crucial that the quality is right compared to the competition and that customers are tracked to see if they were satisfied with the service. In this way, market penetration can be achieved.
The model is also suitable for calculating price sensitivity to different products and services if they have similar characteristics to those of competitors. It can also be used to calculate how large the impact of the new product must be on improving the customer’s quality of life so that the customer changes supplier even though both suppliers charge a similar price.