This past week’s economic news was flooded with apparent contradictions. Consumer confidence fell to a twelve-year low while consumer spending is up a healthy 2.6%

There are plenty of reasons to explain the difference. Spending can be driven by certain categories such as retail or by particular groups with higher incomes. Timing can also explain the difference as sentiment is considered a leading indicator of spending instead of a coincidental one.

Sometimes, however, what people say and what they do are different. This is known as stated versus revealed preferences. A stated preference is what someone says they want, believe, prefer, or intend to do. Revealed preferences are what their actual choices show they value.

For example, we say we prefer local, organic food but instead buy the big box store chicken that’s $2.00 per pound less. We might prefer healthier food, but we probably prefer cheaper prices more.

That’s why we have to be careful about listening to what our customers say and instead place more value on what they do.

Perhaps the most famous business example of stated versus revealed preferences occurred in the 1980s.

In 1985, the Coca-Cola company decided to change the formula of their almost 100-year-old, heavily guarded recipe. Coke was the global leader in soft drink sales and outsold rival Pepsi 2:1. So why the change?

For more than a decade, Pepsi had conducted the “Pepsi Challenge”. The challenge was a blind taste test campaign pitting the two colas against each other. The reported results were that customers preferred the taste of Pepsi. Pepsi had also began to marginally erode market share from Coke.

Coke began working on a secret formula and tested it with almost 200,000 consumers in the years leading up to the change. The overwhelming result was that consumers preferred the sweeter, New Coke version.

New Coke was a disaster. The company received 8,000 angry calls per day during the firestorm’s peak. Protests and lawsuits ensued demanding the old formula be reinstated. Just 79 days after the launch, it was. Just seven years later, New Coke was quietly discontinued.

What went wrong? Blind taste tests, like surveys, can provide too many confounding variables. Most importantly, they’re often completely out of context for how customers actually use the product.

If you’re only taking a quick sip of two beverages, most of us will prefer the sweeter one. But almost none of us consume soft drinks in that way. We consume them in 12 ounce or larger portions during a meal or while watching a movie or engaging in other forms of entertainment. We also have emotional attachments to different brands. The blind taste test was measuring the wrong thing and it was just a survey. It didn’t demonstrate real behavior.

How can we avoid the same mistake in our own businesses? We need to obtain results from customers as they climb the Evidence Ladder for our products and services. It’s not that surveys and taste tests aren’t valuable, it’s just that they’re the weakest rung on the ladder. We need to receive stronger signals from higher rungs before committing time and resources to product or service development and distribution.

“I like this!” or “That’s a great idea!” have probably led to billions of dollars lost on failed product launches and failed businesses.

Opinion is the weakest of all signals. Why? Opinions are cheap. No one has skin in the game. It’s subjective. There isn’t a wrong or right. You don’t lose money, time or other resources from submitting your opinion.

They can be valuable in the extreme. For example, if your taste test participants spit out your product, then you might need to re-evaluate.

The best way to get value out of opinion surveys is to include intention.

Intent is one step closer to behavior. The person isn’t just expressing approval or disapproval but forecasting their own future action.

“I would buy that” or “I would pay an extra $10 per month for that feature” is predicting future behavior.

Unfortunately, we humans are terrible predictors of our own behavior.

All is not lost, however. Expressing intent puts us in a different psychological state.

We’re imagining a future where we take positive action involving your product.

Customers demonstrating effort is the first higher value signal. It’s behavior based.

They now have skin in the game. They’re paying a small price, usually in time, inconvenience, or information.

Examples include:

Effort is the point where intent becomes behavior.

Billion-dollar businesses have been built here. Platforms like Nextdoor achieved a $1.1 billion dollar valuation before making $1 in revenue. The valuation was backed by their ten million users whose effort was a mere ten minutes per day of app use.

Follow the money. People vote with their dollars.

Five people actually paying $20 per month for your app provides infinitely stronger evidence than one hundred people saying they would.

The information value of those five people is also higher. It gives you much greater clarity on your target customer archetype.

Size matters here, though. Just because someone will pay $5 doesn’t mean they’ll pay $50. Signal strength rises with how much someone is willing to pay.

Many of the scooter sharing companies launched during the late 2010s eventually went out of business because they launched with subsidized prices they couldn’t maintain.

The riches are in your retention. A customer might pay once to try your product or service. Did it deliver? If they do it again, the answer is yes!

The experience was valuable enough for them to choose it again.

A one-time purchase can be impulsive. Repeated purchases can be a habit.

Also, new customers are expensive to acquire. Your customer acquisition costs fall with every repeated transaction from existing customers.

Most of us hate to waste time and money so the more we use of each toward a product or service the stronger the value signal.

What about when we recommend or refer a business to a friend, family member, or colleague? We’re putting our reputation at risk and social capital is as valuable to many as time or money.

Advocacy can include referrals, public reviews, introductions, and offering a reference.

We all like to be the person who knows all the great restaurants. Similarly, we don’t like to be the person who recommended the mechanic who everyone claimed, “ripped them off”.

Customer advocacy is without a doubt the strongest signal of product-market fit. That’s why word-of-mouth is still considered the best form of marketing.

The Evidence Ladder is simple but adhering to isn’t easy.

We want to believe both the customer who says, “I love this.” and the prospect who says, “I’m planning to buy in six months.”

We especially want to believe them when their words confirm what we already believe about our product.

Higher-rung signals require sacrifice while lower rung ones are cheap.

When the signals conflict, move up the ladder.

If customers say they love a feature but don’t use it, trust usage.

If prospects say the price is fair but don’t buy, trust the transaction.

If customers say they’re happy but don’t renew, trust retention.

What customers say can help you form a hypothesis. What they do confirms or rejects it.

The closer someone gets to sacrificing time, money, convenience, or reputation, the more seriously you should take the signal.

Listen to your customers.

But watch them even more closely.

My goal with The Leap is to provide you each Saturday with the knowledge, tools and lessons learned to help you get started and keep going toward building your future. 

Whether you are making the leap to startups, solo-entrepreneurship, freelancing, side hustles or other creative ventures, the tools and strategies to succeed in each are similar.