Behavioral Economics and Enterprise Software Sales: Who is teaching Whom?

I’m almost done reading Daniel Kahneman’s best-seller “Thinking Fast and Slow“, which is a great book on behavioral economics.  (Thanks to Peter Lugli for the recommendation.)  I try to read most of the popularized literature in this field (e.g., Dan Ariely, Richard Thaler, and Michael Mauboussin) partly because I’m an old Economics major and partly because the work has so much to say about marketing and selling.  The work of behavioral economists seems especially applicable to the marketing and sales of intangibles, including enterprise software sales.

Each time I read about the ways we consumers differ from the rational “automatons” imagined by neo-classical economics, I laugh for two reasons: a) because the “anomalies”, in retrospect, seem so obvious and b) because so many of them are already so well exploited by anyone who sells or markets enterprise software for a living!

Here’s a list of just a few of the behaviors noted by behavioral economists.  In each case, I have tried to identify how they are applied in the enterprise software sales world.

• Behavioral economists note the “irrational” behaviors of procrastination, status quo bias, social conformity, and risk aversion that is greater for losses than it is for gains.  I’ll add to this list a rational behavior: desire to avoid switching costs and, voila, we have a recipe for big ERP success, a rationale for “land and expand” strategies, a pretty good explanation for Geoffrey Moore’s Chasm, and an underlying basis for why no one ever got fired for hiring IBM!  Ask any enterprise start-up and they will tell you that battling these collective forces against change is one of the hardest tasks they encounter.
• Behavioral economists note the amazing power of reciprocity that is ingrained in all of us.  That is, if someone gives us something (even something relatively meaningless) we feel obliged to reciprocate in some way.  All good enterprise software sales people understand this one intuitively.  Every major sales training system teaches the salesperson to ask for something in return when they are providing the prospect with something of value.  In addition, reciprocity makes it entirely rational to initially throw out a very high price.  Upon rejecting the absurdly high price, the prospect will have an urge (albeit small) to reciprocate in some way.  In addition, tossing out a high price is also a form of anchoring, another finding of behavioral economists.
• Mental accounting, or our habit of putting something fungible like money, in separate mental “cubby-holes” is another finding of behavioral economists.  This one is ironic because not only do enterprise salespeople run into this phenomenon, but they run into real accounting!   Enterprise software sales people understand that funding software out of operating expenses is generally easier than trying to get an equivalent capital expenditure approved.  This mental, or real, accounting is one of the accelerants of the SaaS explosion in enterprises.
• Overconfidence, another finding of behavioral economists, is something that SI salespeople rely on when scoping integration and change management engagement.  Best to keep the initial, overconfident integration estimates low and then go for the change order later!  After all, mental accounting, often keeps clients from realizing that “sunk costs are sunk”.  Clients, especially those whose jobs are on the line, will keep throwing money at a project simply to avoid admitting failure.   Behavioral economics teaches us that sooner or later a small probability of success will be viewed as preferable to admitting certain failure.
• Choice architecture is the notion that the small, seemingly inconsequential details of a particular decision situation can be powerful.  Every salesperson knows how critical it is to present choices, pricing, and packaging in a way that will influence the final decision.  Product marketing people spend their time on versioning, bundling, naming, etc. for this reason. (And hopefully because legitimately different customer segments exist.)
• The closely related issue of framing, that is how ideas are conveyed and what language is used to convey them, is also prevalent in enterprise sales.   Simple examples from the world of enterprise software sales would include:
  • In the old days of perpetual licenses, support was always expressed as a percentage of the initial price, never a dollar fixed amount.  Behavioral economists (and anyone who understands math) understand that percentages are confounding and can sound smaller than large absolute dollars.
  • Ever notice how small, private software companies (I’m calling you out Coupa and OB10!) always report in their press releases only the percentage gains in sales, customers, transactions etc.  Those numbers sound a lot better than disclosing that your company grew  from $4 million to $6 million in sales (50%!).
  • In the SaaS world, products are often priced per user per month.  Salesforce.com knows that $75/month/user sounds a lot better than $900 per year per user, year in/year out!  And now many software companies like to frame their offer relative to Salesforce’s!

When I first set out to write this post, I was going to recommend that a behavioral economist get together with a sales training company and write a book on how to apply behavioral economics to sales and marketing.  But the more I think about it, the more I think behavioral economists should just get out the lab and watch some great enterprise salespeople in action.  From that, they can deduce how little individual, or even organizational, decision-making resembles a rational process!