Taking the shot: How to overcome our innate fear of losing

Is too much tennis barely enough?  I have been pigging out on the Australian Open over the last couple of weeks, watching elite sportspeople do battle, pitting their physical and mental strength against that of their opponents. What stuck me was how the fear of losing can be more powerful than the will to win; and that's exactly the trap most businesses fall into.  Choking.  When you play defensively waiting for someone else to make a mistake rather than taking the shot. When you are the dominant player and don't change your business model in response to changed market conditions, unravelling as competitors come in and steal your ground.  I'm thinking of you Kodak, Yellow Pages, Nokia, Microsoft, Borders... So let's dig into why and how you can overcome this paralysis.

Fear of losing
Loss aversion is the behavioural principle that I have mentioned most often in my blog articles because I believe it is one of the keys to unlocking an understanding human behaviour.  Our tendency to avoid loss rather than seek gain is one of the strongest, most primal responses that influences the actions we take because frankly, it seems safer. It's a "Better the Devil You Know" approach.  Chasing the win requires stretching into the unknown and that can be uncomfortable whereas structuring your business to hold on to what you have - circling the wagons - is much more familiar.  From small businesses to boardrooms at the big end of town, introducing price rises rather than launching new products, prioritising higher margin but end of life products rather than lower margin growth products, slavishly applying traditional marketing techniques in a new digital world, and staying with incumbent suppliers who disappoint rather than trying someone new are examples where loss aversion may have reared its head.

Overcoming loss aversion
So how can you get over this mental barrier?

Last year I read Timothy Ferris' book "The 4-Hour Work Week".  Ferris' aspirational lifestyle aside, what I found really useful about the book were the processes to overcome fear of taking the leap to a new style of career.  In other words, tips for overcoming loss aversion.

Whilst written from a career change perspective, this process can be used to overcome business fear too.
1. Define your worst nightmare
2. What steps could you take to repair the damage?
3. What are the benefits of more probable scenarios?
4. If it happened today, what would you do it get things under financial control?
5. What are you putting off out of fear
6. What is postponing action costing you financially, emotionally and physically?
7. What are you waiting for?

Another technique I have used, based on Ian Stephens' 7 Step Pathway to Mastery, is to write down;
1. what you want your future state to look like
2. 25 Benefits to you/your business of achieving this future state
3. what this means for your priorities.  Then;
4. 25 disadvantages of of not moving to the future state, and
5. What these disadvantages will mean in 5-10 years (which amplifies the downside of inaction).
And finally;
6. What the benefits will mean in 5-10 years and
7. The steps to which you will commit to achieve your future state.

At their core, both Tim and Ian's methods amplify the negative impacts of loss aversion (by doing nothing or doing the same) to such an extent that it is much less palatable than the benefits of taking action.  And that is the key to conquering loss aversion.  We are all familiar with listing the pros and cons of taking a course of action, but loss aversion teaches us we need to get more familiar with the cons of inaction if we want to be someone who steps up and takes the shot.  Happy conquering.

Image from blogs.abc.net.au

Firing a customer, what holds us back?

Having recently devoured Timothy Ferriss' "The 4-Hour Work Week", I have been contemplating one of the suggestions he makes for optimising your time; firing some customers.  Comes as a bit of a jolt, doesn't it?  Most of us spend our time and energy on attracting new customers and serving existing, so deliberately getting rid of a customer seems so...crazy.

The central tenet of Ferriss' book is that you need to place a value on your time, and knowing which customers are your most profitable and create the biggest return for your time is a big part of managing your business.  In Ferriss' case, "out of more than 120 wholesale customers, a mere 5 were bringing in 95% of the revenue.  I was`spending 98% of my time chasing the remainder...". So Ferris fired 2% of his customers.

Let's take a minute then to consider how two principles of Behavioural Economics can help us understand why we hold on to unnecessary customers, and how to change things.

Sunk cost
Knowing what it takes to get a customer means we are loathe to walk away once we have them.  It's a bit like those shoes you hunted everywhere for.  Oh the joy when you brought them home! But then upon first wearing they sent stabbing pain up your shins and you haven't worn them since. So have you thrown them out? No, chances are they are still in your closet, mocking you. You cannot bring yourself to bin them because you invested so much time, effort and expense in getting them. Sunk cost applies as readily to shoes as it does customers.  If you have customers who are more pain than they are worth, fire them.

Loss aversion
We are driven to avoid loss even more than we are to seek gain.  "A bird in the hand is worth two in the bush" comes to mind.  We often put up with customers that we should not because of two common reasons;

• we are terrified we will never replace them.  And, guess what? If you continue to invest your time and resources in unprofitable customers, you won't have those resources available to source new customers.  To reduce your loss aversion, do some number crunching. Add up all the hours and stress that your painful customers create, multiply it by your hourly rate and compare it to the revenue those customers generate for you.  Now contrast that with the hours, stress and revenue generated by your top customers. Feeling less scared of ditching the bad apples?
• we are terrified that our competitors will grab them. We are scared that if we fire a customer, then our competitor will move in and all of a sudden, ruin our market share.  It's possible.  But remember why you wanted to rid yourself of these customers in the first place - they were not making you enough money for the effort involved.  Let your competitors wear the albatross around their neck, bogged down with customers who are overly demanding and unrelenting whilst you swoop in on the profitable targets.

And for those who work in a small market where there are not many customers, and loss of one will dramatically impact your business, here's the tip. You still need to understand your return on investment from these customers. If you do not want to go as far as firing them, look to changing the service mix (from face to face to telesales for example, or weekly to quarterly visits), and establish new rules of engagement.  Consider criteria for which you offer premium-end service, and let them know what they need to do to qualify. They then have the opportunity to either improve their behaviour and spend or be satisfied with a less-resource intensive resource model from your end.

As always, let me know if you have a business issue for which you would like a Behavioural Economics perspective by emailing peoplepatterns@gmail.com. Until next week, happy firing.

This article also appeared in Smartcompany magazine.
Image from: http://cdn.thegloss.com/files/2011/02/fired.jpg