Why Habits are the Lifeblood of Your Business

Editor's Note: This
essay is adapted from Hooked: A
Guide to Building Habit Forming Products by Nir Eyal. Nir also blogs at NirAndFar.com.

Habits are one of the ways the brain learns complex
behaviors. Habits form when the brain takes a shortcut and stops actively
deliberating over what to do next.1 The brain quickly learns to codify
behaviors that provide a solution to whatever situation it encounters.

The success of many companies depends on their ability to
find a way to get users to go from infrequent use to being dependent on the
product. It is at the point when customers start to use it on their own, again
and again, without relying on overt calls-to-action such as ads or promotions,
that the product becomes a habit.

These habit-forming products change user behavior and create
unprompted user engagement. Habit formation is good for business in
several ways. Building for habits increases customer lifetime value, provides
pricing flexibility, supercharges growth, and erects competitive barriers.

1. Increasing Customer Lifetime Value

Fostering consumer habits is an effective way to increase
the value of a company by driving higher customer lifetime value (CLTV). CLTV
is the amount of money made from a customer before she switches to a
competitor, stops using the product or dies. User habits increase how long and
how frequently customers use a product, resulting in higher CLTV.

Some products have a very high CLTV. For example, credit
card customers tend to stay loyal for a very long time and are worth a bundle.
Hence, credit card companies are willing to spend a considerable amount of
money acquiring new customers. This explains why you receive so many
promotional offers, ranging from free gifts to airline bonus miles, to entice
you to add another card or upgrade your current one. Your potential CLTV
justifies a credit card company's marketing investment.

2. Providing Pricing Flexibility

Habits give companies greater flexibility to increase
prices. For example, in the free-to-play video game business, it is standard
practice for game developers to delay asking users to pay money until they have
played consistently and habitually.

Once the compulsion to play is in place and the desire to
progress in the game increases, converting users into paying customers is much
easier. Selling virtual items, extra lives, and special powers is where the
real money lies.

As of December 2013, more than 500 million people have
downloaded Candy Crush Saga, a game played mostly on mobile devices. The game's
'freemium' model converts some of those users into paying customers, netting
the game's maker nearly a million
dollars per day.

3. Supercharging Growth

Users who continually find value in a product are more
likely to tell their friends about it. Frequent usage creates more
opportunities to encourage people to invite their friends, broadcast content,
and share through word-of-mouth.

Products with higher user engagement also have the potential
to grow faster than their rivals. Case in point: Facebook leapfrogged its
competitors, including MySpace and Friendster, even though it was relatively
late to the social networking party. Although its competitors both had healthy
growth rates and millions of users by the time Mark Zuckerberg's fledgling site
launched beyond the closed doors of academia, his company came to dominate the
industry. Facebook's success was, in part, a result of the more is more
principle ' more frequent usage drives more viral growth.

4. Creating Competitive Barriers

When it comes to shaking consumers' old habits, better
products don't always win ' especially if a large number of users have already
adopted a competing product. For example, August Dvorak designed a keyboard in
1932 that is far more efficient than the QWERTY most people use today. Dvorak's
design of vowels in the center row proved to increase the speed and efficiency
of typists. However, despite having built a better product, the switch to his
keyboard never happened. Why? QWERTY survives because the costs of switching
user behavior after habits have been formed are too high.

For many products, forming habits is an imperative for
survival. As infinite distractions compete for our attention, companies are
learning to master novel tactics to stay relevant in users' minds. Today,
amassing millions of users is no longer good enough. Companies increasingly
find that their economic value is a function of the strength of the habits they
create. In order to win the loyalty of their users and create a product that's
regularly used, companies must learn not only what compels users to click, but
also what makes them tick.

You can hear Nir speak
at the upcoming Future of Consumer Intelligence Conference 2014 in Los Angeles,
California. The Future of Consumer
Intelligence 2014 explores the emerging role of decision science and the
convergence of knowledge points - insights, foresights, social science,
marketing science and intelligence with technology as a central driving force and
profound connector. For more information
on the event, click here to download the interactive brochure: http://bit.ly/1h9MG2Q

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1. Dickinson, A. &
Balleine, B. (2002) The role of learning in the operation of motivational
systems. In Gallistel, C.R. (ed.), Stevens' Handbook of Experimental
Psychology: Learning, Motivation, and Emotion. Wiley and Sons, New York, pp.
497'534.