When Behaviour Psychology Meets Product Management

Human minds are complex, full of desires and paradoxes that make them so unpredictable at times. This is the challenge faced by all product designers and managers. Essentially, their job is to predict customer behaviour by coming up with new ideas and features that they think will be appreciated by customers. Often time, they are disappointed to find out in the end that efforts have been wasted as customers behave in a completely different way from what they expect.  

Understanding behavioural psychology can serve a business well. The principles of behavioural psychology can be harnessed by a product team to understand potential strengths and flaws of a product idea and ultimately create something impactful and desirable for their customers.

Psychologist and Nobel prize laureate Daniel Kahneman, along with many leading behavioural economists and psychologists have done extended research to understand how our minds work. Based on their findings, McKinsey has developed the CHOICES framework (which stands for “context, habit, other people, incentives, congruence, emotions, and salience”) to categorize. See below a nice cheat sheet with definitions and examples:


Researchers have also found that during any customer experience, there are three factors that impact the level of customer satisfaction:

·     Sequence: the order of high and low points of a customer journey can materially affect the perception of the product. Specifically, unpleasant endings have a strong negative impact that can potentially erase most of the positive perception built up previously

·     Segments: the frequency of high and low points also contribute to how customers perceive the product at the end

·     Control: giving customers control and allowing them to choose what they receive can increase their satisfaction level

A few examples from McKinsey’s research:


Learning about behavioural psychology of your customers can also help you uncover “hidden competitors”. Take Uber as an example. Who are Uber’s competitors? The obvious ones are taxis and other ride-sharing apps like Lyft. However, if we think about it from a psychological perspective, the behaviour that Uber wants their customers to do is “get out of the house and use Uber to get around”. This is getting increasingly difficult to achieve these days given the plethora of apps and products that are designed to keep you in your house while still providing what you need: Netflix, Deliveroo, Amazon Fresh, Blue Apron, just to name a few. These are all competitors for Uber in a sense so their decision to launch their own food delivery service is a reasonable and logical strategy given their customers’ behaviour.    

How to Win Over Customers with Pricing Strategies

“Is the price right?” Whether you are shopping on high street or working on a product you want to sell, this is a question that you probably have asked yourself many times. How exactly do we know what price we should set for a product? Moreover, what’s there to do after a price is set?

Pricing a product too high or too low can lead to lost sales and negative impact on the brand. In this article, I will focus on pricing strategies, namely, strategies that business can use to maximize profitability, defend an existing market from new competitors, enter a new market, or increase market share within a market.

There is a plethora of pricing strategies in the market as businesses become more and more creative. Here are the 6 common ones that we often encounter:

  • Price skimming: When a business wants to maximize sales on a new product, a high introductory price can be set along with heavy promotion. Later, the price is gradually dropped as sales momentum slows and competitors appear. This approach allows the business to maximize profits on early adopters before dropping prices to attract wider market so that profits can be “skimmed” layer by layer. This is a quite common technique for tech gadgets and video games.
  • Penetration pricing: A low price is set for the product initially to maximize market shares. This strategy aims to entice new customers with low prices, which may result in initial loss of profit for the business. However, the power of word of mouth later comes in to create compounded demand which helps the business stand out from the crowd. It also sets up a barrier of entry for potential competitors because they cannot produce this product with a lower price. A lot of cable and broadband companies tend to use this strategy with a cheap introductory price for the first year of the contract, followed by price increases thereafter.
  • Premium pricing: In some cases, a business may intentionally set prices higher than their competitors. This strategy works well with products that are in the early stage of their life cycle or products have unique features. Customers need to perceive the product as being worth the higher price so the business needs to put a lot of efforts in product quality and marketing campaigns in order to create a strong value perception. As seen in a lot of luxury brands’ stores, the product packaging and store décor will also support the premium price tag.
  • Economy pricing: This strategy is used by businesses to attract the most price-sensitive customers. Such businesses tend to minimize costs associated with marketing and production in order to keep the final product prices low. We see this in action while shopping at Walmart, Costco, and Target which focus on attracting a specific segment of the market in order to generate sales volume rather than to maximize profit margin per product.
  • Psychology pricing: The price is set based on the assumption that a given price point, color, or name has a psychological impact on consumers. This strategy encourages customers to respond on emotional levels rather than logical ones by creating an illusion of enhanced value. For example, the retailer will sell a pair of jeans for $99 because it’s proven to attract more customers than the one selling for $100, even though the actual difference is quite insignificant. One explanation is that customers tend to pay more attention to the first few numbers on a price tag.
  • Bundle pricing: A group of products are bundled together and sold at a lower price than if they were purchased individually. This is a popular strategy used by supermarkets where they have “buy one get one 50% off” or even “buy one get one free” promotion frequently. This is an effective way to move unsold items that are taking up inventory space. It also increases the value perception from the customers’ perspective as they are essentially getting something for free.

Pricing is a balancing act of both art and science. A pricing strategy provides a forward-looking plan for price changes to win over customers. Combined with the right pricing strategy, a business will find it much easier to get ahead of the competition and create sustainable profit streams over the long run.

Habit-forming Products: What’s in the Secret Sauce?

With the ever-advancing technology we have nowadays, barriers to entry have become lower for almost all industries compared to a decade ago. Competition is increasingly fierce and a product can no longer differentiate itself from the crowd by simply being “good”. It needs some extra spice, something that entices customers, gets them hooked and keeps them coming back for more. In other words, a truly good product should possess a habit-forming attribute.

It sounds like an easy concept, but what does it take to change customers’ behavior and make them use a product out of habit?

Habit is defined as “a mode of behavior acquired by frequent repetition and has become nearly involuntary”. As human beings, we all have different habits and most of these habits are performed nearly or completely unconsciously. Nir Eyal, lecturer at Stanford and author of Hooked: How to Build Habit-Forming Products, says that habits are a powerful and invaluable thing for business because once it is built into a product, customers no longer require expensive advertising or spammy emails to reach it: They become engaged users and loyal supporters of the product.

Eyal argues that habits are formed due to pain points. A pain point is a problem that customers have and are actively looking for solutions to address. To help customers form a habit, a product needs to present a hook –  something that can connect customers’ problem to the company’s solution with enough frequency to form a habit. A hook is comprised of the following 4 components:

1.    Trigger – The goal of any habit-forming product is to create a trigger by mentally associating emotions or problems with the product. When such a trigger is formed, every time customers feel a certain emotion or face a certain problem, they will automatically reach for a product with little conscious thought. For example, YouTube is used for boredom, Facebook for loneliness, Google for problems, Fitbit for improving fitness.

2.    Action – The trigger prompts customers to take the intended action – reaching and using the product. To increase the likelihood of customers taking this action, this needs to be as easy as possible. Pinterest is a great example in this case because it reduces user action to simply selecting (pinning) things they like when surfing the web, automatically creating various lists quickly and effortlessly.

3.    Variable reward – After taking the intended action, customers will be rewarded by having their pain point resolved. Rewards alone, however, are not enough to create desire and form a habit. The trick here is to introduce variability and construct multiple levels of reward. This is because human beings are actually more motivated by the anticipation of reward than by the reward itself. Lotteries and gambling games are classic examples. Such variability keeps customers coming back in the future in order to obtain the highest level of reward.

4.    Investment – Lastly, to ensure the habit lasts in the long term, customers need to be engaged enough to invest in the product. This investment is generally some combination of time, data, social capital, or money. Fitbit is a great example when it comes to user investment. The fitness tracker makes it extremely easy and fun for a user to record various health-related data and activities on a daily basis. The more data it collects, the more valuable it becomes to that particular user because the resulting graphs and analyses are completely personalized. The user can also use these data to compete with friends who use Fitbit. Such user investment can help turn a product into a habit quickly and sustainably.

Different products have different ways to become habits for their customers. Additionally, a product does not need to be habit-forming for all of its customers. As long as there is a core user base in that habit-forming area, and the user base is growing continuously, the product will be able to grow and evolve. Of course, not all products need to be habit-forming to become viable and successful, but if leveraged in the right situation, habit formation becomes the secret sauce for cooking up a competitive product in an increasingly crowded market.


Innovate or Die: What’s a Big Company to do

Fintech, machine learning, big data, automation… these are the buzzwords frequently seen on the front page of websites, newspapers and magazines nowadays. We usually associate these buzzwords with innovative startups and tech companies. Does this mean that traditional big companies are not doing enough to innovate, and are destined to be replaced? Why do we not see much innovation happening at big companies?

Bob Dorf, a serial entrepreneur and the author of The Startup Owner’s Manual, says that companies should find and celebrate mistakes in evolving their products in order to innovate and create new products that customers actually want to use.

Nowadays, a lot of traditional companies’ growth rates are minimal, and often stem from cost-cutting or mergers and acquisitions. Granted, part of the growth challenge is driven by macroeconomic factors, but in order to identify and implement new growth opportunities, companies should consider a ‘trial and error’ method. Dorf argues that big corporations operate in “execution mode”. They put great emphasis on historical figures, not only to measure their performance but also to set up future revenue plans. The problem with this approach is that it is very backward-looking and not future-proofed, especially in a world where startups formed in someone’s basement have the potential to disrupt a whole industry.  A startup does not have any of that history, so it begins in “search mode”. It places emphasis on customer discovery and new product testing, where big companies don’t feel comfortable due to the perceived higher risk.

That is not to say that big companies don’t try at all. In fact, it is increasingly common to see an internal startup-like team in a traditional big company focusing on new product development (i.e. a fintech team within a big bank); however, such teams have generally seen limited success. The reasons are three-fold.

Firstly, the rulebook of a big company is usually too restrictive and complicated for these lean teams to succeed or maximize their full potential. Every new initiative must go through multiple rounds of reviews and approvals by senior management, legal, compliance, risk management, operations… the list goes on. Too many stakeholders are involved in this initial process, and everyone wants to add a few line items to the rulebook. Failure is a big taboo, so the team must be able to make the product profitable in a short timeframe and everything must be strictly done by the book to avoid regulatory visits or lawsuits.

Additionally, senior management sometimes has unrealistic expectations on the development process and the end product. They want the lean team to create something amazing with the least amount of time and cost to the company. What they have forgotten is that a truly great product usually requires tweaking based on continuous user research and iterating, and therefore may go over the budget or deadline. Senior management’s lack of tolerance for the unexpected can be detrimental to creating an innovative product.

Lastly, employees at big companies are often not incentivized enough to take the risk of supporting, sponsoring, or jumping into the unknown. This is not a huge surprise since stability and predictability are assumed benefits of working at a large company. Why should I risk my professional capital and reputation on something that may or may not work? There is sizable risk-reward asymmetry when it comes to innovation at a traditional company compared to a startup: a successful product launch at a startup can bring the leading team both wealth (increasing the value of their equity) and fame (coverage of the product by broad media). A big company, however, is restricted by its corporate compensation guidelines which limit the reward it can offer to incentivize employees and foster a healthy environment for innovation.

Every company craves for creating and owning a disruptive product. It is time for traditional companies to put more emphasis on product innovation and cope with the risk, because the alternative may even create higher risk and damage the company’s competitiveness in the long term.