Contact BSI
Derrick Daye
888.706.5489 Email us
Brand Management

Why Habits Build Business And Brands


Why Habits Build Business And Brands

Habits are good for business. In fact, many industries could not survive without them. The incentive systems and business models of the companies that make habit-forming products require someone gets hooked. Without consumer habits, these habit-forming businesses would go bust.

While most of us think of cigarettes or gambling as habit-forming products, the fact is, a much wider swath of industries rely on consumer’s using their products without thought or deliberation. These habit-forming businesses have no secret agenda or nefarious ambitions. They are in business to give people what they want, even if at times, what the consumer wants isn’t necessarily good for them. But like every other company, habit-forming businesses are run by well-intentioned people. Hard-working folks with families and dreams of their own. So how then can these two realities coexist? How can companies seek to hook their customers, while also being run by decent people who have just as visceral of an aversion to manipulation as the rest of us?

The Habit Business

The answer lies in the business imperative. An enterprises’ worth is the sum of the future profits it will generate. MBAs are taught to calculate the value of an enterprise this way and it is the benchmark investors use to determine the fair price of a company’s shares. CEOs and their management teams are evaluated by their ability to increase the value of their stock. Their job is to implement strategies to grow future cash flow by some combination of increasing revenues and decreasing expenses.

Creating consumer habits is an effective way to drive share price by increasing what companies call “customer lifetime value.” CLTV is the amount of money made from a customer before they switch to a competitor, stop using the product, or die. Some products have a very high CLTV. Credit card customers for example, tend to stay loyal for a very long time and are worth a bundle.

Someone Must Get Hooked

Acquiring customers is expensive and time consuming. Ensuring customers are habituated to using a product decreases these expenses, thereby increasing enterprise value.

It’s worth noting that a surprising number of businesses follow a negative binomial distribution, also known as a Pareto concentration. Typically thought of as the 80/20 rule, the phenomenon occurs wherever a few buyers account for the vast majority of revenue. However, at times that split can be much more skewed than one might think.

While for most consumer goods, the concentration tends to be 60/20, for online gaming companies like Zynga, 100% of the revenue comes from just 2% of players.

In most consumer-facing businesses the Pareto Law applies. These customers are obviously very important to the company because without them, the enterprise could not survive, their profit margins simply would not allow it.

The combination of a business imperative to drive shareholder value by increasing CLTV along with the identification of the most loyal customers, means companies spend significant resources competing for a small set of “heavy users.” Habit-forming businesses are therefore highly motivated to hook customers – and keep them using their products for as long as possible.

Contributed to Branding Strategy Insider by Nir Eyal. Excerpted from his book Hooked: How to Build Habit-Forming Products

Build A More Valuable Future For Your Brand. Join us in Hollywood, California for Brand Leadership in the Age of Disruption, our 5th annual competitive-learning event designed around brand strategy.

The Blake Project can help you identify and develop your brand purpose.

Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Licensing and Brand Education

FREE Publications And Resources For Marketers

Recommend this story

Subscribe, Follow and Stay Connected to BSI


Leave a Reply

Submit your comment

More posts in Brand Management

Brands Must Be Aware Of Their Social Contracts

How Brands Can Compete In A Polarized World

Building Brands On Community And Belonging

The Dichotomy Of Brand

Make (BRAND X) Great Again

How To Create A Lifestyle Brand

How Tech Can Build Human-Centric Brands

Why All Brands Need A Brain Trust