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B2C Bleeds into B2B – Cloud and software companies need to understand people are people

May 11, 2012

Which is a better bet: a pro coach will continue to do the same thing even if it means an 8-8 season, or take a chance by doing something new and have a 9-7 season? A recent book, Scorecasting, makes the case that more coaches would do the former because they are loss adverse, as are their bosses, and that 9-7 record could open up questions along the lines of “if you didn‘t do the crazy stuff, would you have had a 12-4 record and be in postseason?”

Loss Aversion is part of behavioral economics, and behavioral finance, referring to the human aversion to losing, to the point where the pain for a loss is twice as psychologically powerful as is the pleasure derived from wins. How do we make it more painful for the customer not to decide to buy from us than being afraid of making an incorrect decision?

SaaS vendors increasing use of Fremiums to overcome risk aversion is common in the B2C market, through the use of advertising supported lite versions. But does the lite version have sufficient functionality to make it too painful to remove? Instead of a lite version, why not try a 15 day trial so the psychological cost of removal is too high. That would play the Loss Aversion card.

B2B sales cycles, in both the licensed software and SaaS communities, do not go the Fremiums route; instead they rely on the time honored (incorrectly) generic demo or standalone trial of the full product. Neither makes the psychological cost of uninstalling the product too painful as there’s no integration into daily life. Demos and trials remain on the side, treated as experiments, devoid of emotional attachment.

Case in point. A client was evaluating claims processing systems. The hi-tech vendor comes in and shows, by changing some lines of XML code, how the entire application could be quickly modified on the fly. The potential end users were terrified. It was too big a departure. Another vendor came in, showed how their laggard of a product fit into the status quo as a logical next step, and closed the sale after that demo.

Loss Aversion places additional Cost of Sales on the B2B SaaS/Cloud based vendor community. In order to massively scale (the SaaS model), sales are often done online or via telesales. A prospect calls or links to a demo site where a vanilla version of the system is easily shown and seems generally applicable with the product seeming easy to use. For example, SaaS based CRM systems are often sold this way. You get a demo, where you enter a name, opportunity and a few other elements. After about 10 minutes, tops, the telesales agent makes their pitch to close the sale, while you’re still on the call, tempting you with some loss of a special offer, rather than a discount (the sales script has Loss Aversion wording built in, but at the wrong target).

This generic demo model is starting to negatively impact the B2C SaaS vendor community, and will increasingly do so going forward.  For example, we are seeing a number of companies moving to Cloud based software, and then having serious troubles adapting it to their distinct needs as well as being cleanly integrated into their existing software and process portfolio. These companies loudly complain they’re not much further along after a year of expensively attempting to implement anything more than the basics. Why do they stay with it? For the same behavioral reason people stick with poorly performing stocks – the perceived pain of a loss overcomes rational thought. However, there is a ‘Loss Aversion Penalty’ to the SaaS vendor. As increasing numbers of unhappy buyers complain to their peer community about their sunk costs, and seeming inability to throw in the towel to cut their losses, a general negative market perception will form. In turn, a now warned market will force sales cycles to become more and more drawn out. With the pricing models of most SaaS products involving a small fixed price per year per user, or a few thousand per month, there’s not much room for anything but a generic quick close sales cycle.

One solution is to open a sandbox site, staffed by sales oriented Business Analysts/Configuration specialists. The new model will be where the prospective customer and the vendor co-create a proof statement, based on a pre-agreed set of parameters with some basic pre-developed linkages to the prospect’s existing systems and processes, utilizing pre-defined interfaces to a few of the most commonly found data-movers, such as the leading ESB’s and ETL tools. This proof statement, of course, has to show how great the product is, the gee-whiz factor. More importantly, it has to appear as if it is the logical next step(s) and not totally dissimilar from a functional point of view to minimize feelings of risk in change, i.e., its only 40% about doing it radically better, while its 60% about not screwing up the decision.  In most companies, it’s better politically to do nothing, avoiding potential pain,  than make a bad decision.

Customers increasingly need to see not how their decision will be right, but how by not making a decision they will be wrong. They need to feel the pain of evaluating, and then not buying and dismantling the pilot, is more than the pain of saying no. B2B SaaS vendors need to rethink their sales processes, adjusting their cost of sales and pricing models accordingly.

Post script: In today’s NY Times front page (and all over the TV business news), is a report about a JP Morgan trading team blowing a complex hedging strategy, costing the bank $2B in hard cash.  Looks like it became too painful to cut the loss when they still had some money left on the table.

People are people.

Richard Eichen is the Founder and Managing Principal of Return on Efficiency, LLC, http://www.growroe.com and is one of their senior turnaround leaders/CROs, Program Rescue and Interim Executives with over 25 years’ experience reshaping companies, Operations, IT/Systems Integration and key initiatives. Return on Efficiency , LCC specializes in those companies and initiatives where technology is the primary means of service delivery and revenue creation.  He can be reached at richard.eichen@growroe.com

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