On startups and behavioural economics

Sequoia Capital has published a very useful post on how startups can price their products appropriately. They talk about how theoretically rational economics should be a guide to deciding what price to set for your product; it’s an assessment of demand vs. supply. But they also mention two key factors that affect startups which aren’t typical of other companies: startups aren’t bound by a finite production schedule (once an app or site is built for example, it can live ad inifinitum) and that a competitor benchmarking exercise might not be all that useful because startups usually aim to bring a completely new offering to the marketplace and therefore don’t have much to benchmark against.

So behavioural economics comes into it – anyone familiar with Nudge or Dan Ariely’s work amongst many others will know about peoples’ propensity to buy products based on various biases; Sequoia mention the decoy effect with regards to pricing.

As much as behavioural economics comes into marketing commercial products (soap, shampoo, chocolate), it comes into marketing startups – where a startup’s product is usually itself.

Why is this important?

While startups conduct user testing for products to assess market fit and pricing amongst other things, they don’t often take the time to think about what they want their product and company to *mean* to people; how people might perceive them (this isn’t applicable to ALL startups mind you, but depending on the stage they’re at I’ve found it applies to many). The only things that are usually guaranteed are that they want to expand their user base and want to make money doing it.

From the customer’s POV, behavioural biases can influence people’s opinion of a startup in domains other than pricing, which affects sales. For example, I might not care much for a startup’s product because of biases like the ambiguity effect – the likelihood that I’ll avoid their product because it might seem unknown. If I’m prone to exhibit loss aversion then startup X might be better off telling me why they’re better than Y judged according to specific criteria if they want to acquire me as a customer (why I should use This Is My Jam over Spotify Social when I’m an existing Spotify user, for example). That’s why marketing is important, as Albert Wenger from Union Square Ventures says:

Many engineering led companies have a relatively deep distrust of sales, marketing and business development. While a healthy dose of skepticism is entirely appropriate here, even companies with extremely awesome technology tend to really grow only if they also get sales, marketing and business development right.

Have a meaningful product, and communicate it in a way that shows an understanding of your audience’s biases to get where you need to go. You’ll get a lot of the answers you need during user-testing, but you need to use this knowledge appropriately to market your product in addition to building it. It would be brilliant if all product WAS marketing in and of itself, but my experience has been that that is not always the case, especially not for untested startups (it works for Nike Fuelband, but not everyone is Nike).

Buffer has got the messaging down pat, so much so that even though I heard about the company relatively recently, I’m a fan and motivated to start using it more:

Buffer

My advice to startups  is to get mentoring and advice from people who have experience in this area as early as possible, so that as a founder you can give your product and your company all the support it needs to go to market successfully.

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