Remember the Human Equation

MR MONOPOLYI took a lot of economics courses in college – not quite enough to get a degree, but enough to keep me interested today in keeping track of how economists view the world. One thing that economists have always been trying to do is to build economic models that predict how people act in the real world.

Recently the World Bank issued a new report in a series of what they call World Development Reports and they suggest that economists are still not accurately predicting some key human behavior in their modeling. They mention three areas where economists need to improve their models. I found these three areas interesting, because these are also types of behavior that any good salesperson knows very well. This report reminded me that it’s as important for salespeople as it for economists to keep the human equation in mind. The report said that economists need to do better in reflecting the following three things:

The first principle is that all people think automatically. Automatic thinking means that people are often intuitive and impulsive. This differs from a lot of economic models that assume that people are logical and deliberative when making buying decisions. Certainly some people and businesses make deliberate buying decisions. But the real world is full of examples of things we all do that are not logical. Perhaps one of the most common example is how we save for our retirements. I don’t think you can find anybody who doesn’t understand that saving for retirement is really important. Yet a majority of people still don’t take the steps needed to be ready for retirement.

And every good telecom salesperson knows that buying decisions are often made on impulse or based upon emotional factors and are not always fully logical. When somebody changes telecom providers they generally do so somewhat blindly and based upon trust. They really hope that the quality of the service or the level of customer service will be better with the new provider than it was with the old provider. And so they often make an emotional decision to change based upon something they don’t like about their old provider—perhaps a negative billing issue or customer service experience.

The second finding in the Development Report is that humans think socially. This means that they often make decisions based upon either pleasing others or in accordance to what other people think. By contrast, economist models generally assume that people make decisions based upon their own selfish best interest. This finding isn’t as relevant to telecom buying as the other two items, but salespeople still see it in the market. For example, it’s a lot easier selling to people with kids to make the sales pitch based upon what’s good for the kids rather than what’s good for the parents.

The third principle is that people often think using mental models. For example, people might identify themselves as part of a larger group and make decisions based upon that identity. For example, young urban millenials are now a very hard sell for traditional cable TV. Once somebody is a part of that particular culture then they often make many buying decisions based upon the peer pressure of their friends. They might not buy a car and instead use Uber and they might not buy traditional telecom services and rely completely on their cellphone and other people’s WiFi.

It is possible to break a group identify mindset, but it must be done deliberately. For example, many elderly people are of the mindset that technology is beyond them and so they are immune to any normal sales pitch you might make to them. But if you take the time to show them what technology might do for them and let them know that there is training and help for them to learn to use the Internet, then they can become good customers.

I build a lot of business plans and every client who is thinking about building a new network always wants to know what their market penetration rate is going to be. That’s an easy thing to predict if you build in an area that doesn’t have broadband, because most people in that situation will buy what you have as long as it’s affordable.

But it’s a lot harder to predict market penetration when building to a market that already has broadband. Predicting the take rates in existing markets requires understanding the human equation. Here are a few of the things that I tell people, based upon the experience of having seen hundreds of market launches:

  • If you sell residential broadband you are almost always going to get at least 20% and maybe as much as 30% of the market rather easily as long as you have a decent price and as long as your product works well. It seems that in every market there are at least that many people who just can’t stand the incumbents and who will leap to a new competitor. And if you do a good job you will generally keep these customers.
  • But after this first easy pile of customers, how many customers you get is going to depend upon how good you are at selling. And selling means understanding the market and understanding the human equation. I generally see that companies that sell based upon having a good story to tell will do better than companies that try to sell on price alone. A customer that buys from you due to a low price will also drop you when they find a better price elsewhere. But if you can instead show them that there are reasons other than price to use you, then you have a chance of building a loyal customer base.

Interestingly, almost all businesses buy based upon reliability, and not price. Business customers know how badly they suffer when their voice or Internet service is down and so they care about the reliability of your network first and foremost. So selling telecom to businesses is something that meets existing economists’ models well because most businesses will choose a telecom provider deliberately and logically. It’s easy to build models to predict business penetrations, because if you do a good job and you are willing to put knowledgeable salespeople on the street, they will be successful over time.

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