Fancy a good reward? You’re in the right place. Welcome to part three of my deep dive into habit-forming products.
In part 1 of the series, I touched on habits and investors and how they can help each another. In part 2, I spoke of the habit-forming pattern and two out of the four stages it requires for a behavior to happen. “Triggers” and “Action”.
Let’s now have a look at the “Rewards” and “Investment” stages of the pattern. It should help you invest wisely. I can promise you, after that, you will have a much better understanding of why sometimes certain products go on to make millions or billions, while others don’t. Essentially, you will understand why habit-forming is (or should be) so important for investors.
The rewards of habit-forming products
Once an action is taken, the user must definitely receive a reward. These rewards can vary according to the point of origin and impact. By origin, I mean:
- Rewards that come from your social environment. This is how accepted you are by other people.
- Others that come from personal effort to gather material resources or information.
- Rewards that come from intrinsic motivation, such as competence, mastery and completion.
In order for a person to feel rewarded by an experience, autonomy is paramount. People must have control over their choices. Choices are, after all, what will increase the probability of them taking the desired action instead of opting against it. Choices will also retain people’s repeated engagement.
Repeated engagement requires a variable user experience with low predictability over the outcome. Otherwise, people can and will lose interest. And this is actually the reason why a degree of sustained variability with each use of the product has the potential to maintain user interest. That’s your churn rate being mitigated like nothing else! And for you investors out there, does this not indicate growth?
What do people find rewarding?
Interview a few customers in an effort to find out if there is a “wow” moment throughout the user experience. Are there any delightful or surprising moments while people use your product? Is there anything particularly satisfying that would invoke repeated engagement?
To find out the shape of the equation, it might help if you recounted the steps users take while using your product, after it’s become a habit for them. Does it really do a good job of alleviating their pain? Is it satisfactory?
But here’s a trick question: However satisfactory, does it leave them with the desire to revisit?
You can always put this to the test by contrasting it to the origins of variable rewards we mentioned earlier. If you can match it to at least one of them, you should be good to go.
User’s investment
Investment on the user’s part, is greatly about the anticipation of future rewards. In essence, our sense of overestimating the value of our work, along with our tendency to revert to past behaviors will most likely create a special preference on our behalf. That is, towards the product we’ve invested time and effort in. This kind of investment with the potential of such bias, occurs right after a reward. Because it is at that moment that we are already set and ready to re-engage.
Reciprocal improvement
A user’s investment actually increases the much needed variability, inasmuch as it changes and improves the user experience and eventually the product, by introducing better suited content using the data the user has put in, as well as improved skill or reputation for the user. An improved user experience and increased variability is usually all that is needed to set up users for the next trigger for action. Not bad eh?
To ensure users’ investment, you need to know what users are adding to the product, which will increase their chances of returning. It’s a good practice to always be on the look out for simple ways to make users add small investments into the product, thus invoking a recurring, or rather a reciprocal improvement. With every investment, though, you should run a reality check: Do people use the product as intended?
Why habit-forming is so important for investors
I know. This is quite a long story. But so far, we have only glimpsed at what the steps are to making habit-forming products and what the benefits are to an investor, as opposed to other non habit-forming products.
Before finishing off, I think it’s worth taking a closer look at the benefits of a habit-forming product to an investor.
Benefits of habit-forming to investors
If you’re into Lean Methodology, this will work like a charm for you. All in all, the considerations we went through regarding the process of forming a habit will help your team design and produce an early prototype that has the potential to get users to behave in certain ways.
Following its logic and getting through its steps has an interesting side effect, too. It will help you see through possible weaknesses in the product’s ability to keep users engaged. This also means that you can deduce the features that actually facilitate desired behaviors and make improvements accordingly.
So, to cut a long story short, this whole process will greatly reduce your waste. While this is great news for an entrepreneur, it’s even more important from the investor’s standpoint. Knowing that you can operate with minimum waste, can let you get creative with your investments, maximizing your effect on their runway, and with better capital efficiency. This will also provide some leeway for a few more pivots, should you need them.
So, now, instead of just having an investment with potential, you have an investment with substantially mitigated risk and better chances of an extended runway. That should be good enough to sustain a few pivots, and minimal waste which prevents your reputation as an investor from passing you by, as none the wiser.
What’s next? Invest!
Well, it’s quite straightforward. If you were looking for a TL;DR section, here it goes.
Next time you come up against an investment opportunity involving a digital product or SaaS and you want to actively help pave the way to success, keep this shortlist of considerations in mind:
- Find out whether the product or service is a habit-forming one
- Identify the features that define it as habit-forming
- Identify the behaviors that occur as a result of these features
- Use these behaviors to modify the product, so that it can influence more users to take desired actions
- Use this process to gradually fulfill a market segment
- Then, use the same process with different interfaces to fulfill adjacent or otherwise different market segments. Use it even to identify threats to your existing solution
This entire process will lead to new opportunities for you to form habits. Which actually means new business opportunities, all through transformative behavior! In short, you can’t lose!
P.S. Thanks for tuning in to this special three-part exploration of what I consider a vital topic for modern investors. I hope it has helped you determine a more accurate course of action next time you’re on the look out for investment opportunities.
