It is difficult to admit, but we, salespeople, are all addicts. It’s not a substance abuse problem that we suffer from. It is instead “hopium” that has a hold on our industry.
What is hopium?
Hopium is holding on to a bad opportunity for weeks, sometimes months on end, hoping that a miracle will happen at some point in the future so that the opportunity will get “Closed Won”. Let’s be honest...we’ve all done it.
The issue is that it’s not just “bad sales reps” who do this, nor is it just the odd bad opportunity here and there. Our research shows that the problem is so pervasive that, on average, close to a third of all committed opportunities in a given forecasting cycle were already “dead” at the time of commitment. It should therefore come as no surprise that 57% of reps missed their quota last year.
This series of blog posts aims to do two things. Firstly, shed some more light on how our brains work so that we can understand why we have an addiction to hopium and how it affects the decision making process of sales professionals. Secondly, we present a practical framework that can be used to diagnose and measure the severity of a hopium addiction in any sales rep, team or company. By adopting this framework, your reps will be able to objectively decide which opportunities are worth pursuing and which should be discarded. This will maximise their chances of winning and thus improve their overall sales performance.
Let's get into it.
Poker, Coffee Mugs and Overvalued Opportunities
or How the Endowment Effect gets in the way of hitting your sales quota
If you play poker, you would have most likely heard this saying:
In poker, the person who wins is the one who wins the hand.
The runner-up is the one who folds first.
It’s a pretty straightforward concept; if you’ve been dealt a bad hand, you should fold your cards and wait for a better draw. More often than not, however, players will over commit hoping that their fortune will turn on the first draw. The second? The third? Until it’s too late.
This is true not only for rookies, but also for professional players. In a game of odds you would expect pros to be cold, clean and rational individuals, acting with the sole objective to maximise their welfare (the very definition of the economic man, or Homo economicus). But this is often not the case. We are all great at calling a bad hand. Until it’s our bad hand. The reason for this is a psychological bias known as the Endowment Effect, which is very likely to inflate the perceived strength of our own hands just because they’re ours.
The Endowment Effect shows us that once we own something we irrationally overvalue it, regardless of its objective value. Put simply - we value the things we own more than identical products that we don’t own.
The Endowment Effect occurs because of two psychological biases:
* Loss Aversion:
We feel the pain of loss roughly twice as strongly as we feel the pleasure of an equal gain.
We fall in love with what we already have and are prepared to pay more to retain something than to acquire the same item.
In one of the most famous studies of the Endowment Effect, Pros. Kahneman, Knetsch & Thaler conducted an experiment to see how the endowment effect influences our decision making.
The scientists randomly divided a group of students into buyers and sellers and gave the sellers coffee mugs as a gift. They then asked the sellers how much they’d be willing to sell the mug for and asked the buyers how much they’d pay for it.
The results showed that the sellers (the students who had been endowed with mugs) placed a significantly higher value on the mugs than the buyers did. They were willing to sell a mug for $7.12, while buyers were willing to pay only $2.87. This was a 2.5 times difference.
If you think you’re immuned from the Endowment Effect because you know better than those students, who “clearly lacked real world experience”, then think again. In an experiment almost identical to the above, but with car salespeople and estate agents instead of students (participants you’d expect know a thing or two about buying and selling), researchers discovered the same overvaluation of owned goods of about 2.5 times that of unowned goods.
So, is the Endowment Effect affecting your sales performance?
To answer this question, we looked at a sample of 11,889 deals (lost: 6,298, won: 5,591) closed on Heresy by 105 teams.
Looking at the density histogram, with the no. of days until close along the x-axis and the frequency of occurrence on the y, we can clearly see that won deals are skewed to the left. This shows that deals are often closed quicker when they are won than when they are declared lost.
To further understand the magnitude of this discrepancy we looked at the median days to win a deal vs to lose a deal:
Time to Win = The median days to win a deal = 24
Time to Lose = The median days to lose a deal = 65
As you can see, it took reps roughly 2.7 longer to lose a deal than to win one. This multiplier is almost identical to the one discovered by the studies we looked at earlier.
In the case of sales, however, this trend exacerbates as deals increase in size. The larger a deal, the longer you’re likely to hold on to it before declaring it “Closed Lost” (bad news for those of you in enterprise sales).
So what can you do about this?
Just like everyone else you’re prone to have your judgment clouded by emotional and psychological biases such as the Endowment Effect. Committing to bad deals is an inevitability, but minimizing the impact of a bad deal is a necessity to achieving your quota. The trick in sales, just like in poker, is to know when to “fold”.
In poker, you only have X-number of chips to commit to playing Y-number of hands. The same applies to sales; your chips are the number of business days you have to hit your quota and you want to be careful not to blow them on hands you cannot win.
With reliable data and strong discipline, you can massively improve your odds of winning and thus your overall sales performance. We look at how to do this in the next post in this series.
If you'd like to learn more about how the Endowment Effect and other psychological biases affect your team's sales performenece, you could download our free white paper [HERE]