Let’s talk about loss aversion, why the pain of loss results in irrational decisions, and how marketers are taking advantage of this.

Loss aversion is perfectly summed up by FOMO or the Fear of Missing Out.

It’s the irrational fear of loss. In psychology, loss aversion explains why people, too often, focus on setbacks instead of gains—it explains why the pain of losing is seen to be more powerful than the pleasure of gaining something. In their Prospect Theory study, Daniel Kahneman and Amos Tversky said, “losses loom larger than gains.”

About twice as large!

What makes loss aversion so influential?

Simply put, we hate loss. Receiving something is great, sure—but we don’t love it as much as we hate losing.

If you received a $200 jacket for your birthday, you’d be happy. However, if your dog chewed a giant hole in it the next day, the unhappiness you’d feel would be twice as powerful.  

Losing something or downgrading is psychologically distressing, so we do what we can to avoid it (even if it makes absolutely no sense).

It’s not completely our fault, though. There are intense cultural, socioeconomic, and neurological factors at play when it comes to the power of loss aversion.

Loss triggers a reaction from the same part of the brain that processes fear and risk. Our brains also associate loss with prediction errors and disgust. We’re trained to detest loss.  

We’re extremely vulnerable to loss aversion when it comes to making decisions because as soon as we imagine a choice, we’re emotionally invested and attached.  

People will go to incredible lengths to avoid a perceived loss.

Example: waiting in absurdly long lines to get something for free.

In December of last year, Starbucks created a holiday-themed travel mug that you would get for free if you ordered a Grande holiday beverage. They claimed they would keep the promo going until they ran out of mugs. Nobody knew how many they had on hand, so there were lines around blocks at Starbucks stores across the country. It didn’t matter that the travel mug was valued at less than $5 and made from thin plastic. They had already latched on to the idea of getting a free holiday treat, so not receiving that mug would be considered a significant loss.

People are also likely to make purchases they weren’t necessarily planning on making if you provide them with a free shipping coupon. They’ll recognize that this opportunity doesn’t come along all time, and the thought of losing out on it will persuade them to make a purchase.  

Businesses use loss aversion marketing strategies all the time.

A perfectly executed “flash deal” is a big moneymaker. When a product is deeply discounted for a very limited time, the consumer’s brain focuses on the ticking timer and the amount of savings rather than on the product itself. You probably don’t need another sweater or another cordless vacuum cleaner—but at 70% off, that’s a GREAT deal, right? I can’t miss out on that!

It’s also why pre-orders, coupons, and VIP exclusives work. With pre-orders, it’s an early bird discount—the discount is the prize for ordering early. With coupons, it’s a lot like being given free money. Why would anyone throw free money away, right? With VIP exclusives, all you needed to get VIP status was probably to sign up for a newsletter, and voila! It’s too easy. Why risk missing out on the action?

Free trial periods show people exactly what their life would look like with the product or service, making it exponentially harder for them to end it when the trial is over. They’ve experienced the benefits and identified with that life, so they don’t want to lose it.  

Insurance companies usually have a mile-long list of extremely unfortunate things that could happen to you and how you’ll be negatively affected if you don’t have the proper coverage. No matter how unlikely these events are, they’ve successfully set you up to view them as losses, and you’re more likely to focus on those than the regular payments required to avoid them.

If your business needs to avoid giving people more than necessary, loss aversion tactics can help you sidestep that waste. Studies have shown that when options are presented as addable rather than retractable, people will only take what they want (toppings on a salad, ingredients in a sandwich, etc.).

You can maximize the effects of loss aversion marketing in your small business, too.

The success of your offer entirely depends on your messaging.

Understanding your target audience and their fears is crucial to connecting with them. You need to clearly explain what their life would be like if they don’t purchase your product or service, and they won’t care unless you speak directly to their pain points and experiences. It’s about showing them what they’ll miss out on if they don’t participate soon and painting a picture they can’t ignore.

People must believe there’s something to lose for loss aversion to work properly. If you post an offer for 20% off and claim that it’s only available for the next two days and then post a 25% off coupon the following week, you’ve given people a reason put off making their decision. Even worse, they’ll notice that you contradicted yourself, and any trust they had in you and your brand will start to fade.  

You’re working hard to convert all the “I’ll just buy it tomorrow” shoppers into “I feel good about committing to this now” shoppers. Keep that goal in mind, and you’ll notice a positive trend in your conversion rates.

How about you? How do you leverage on loss aversion? Got a question? Don’t forget to COMMENT below and SHARE your thoughts.

Sources:

https://www.psychologytoday.com/us/blog/science-choice/201803/what-is-loss-aversion

https://www.activecampaign.com/blog/loss-aversion-marketing

https://thedecisionlab.com/biases/loss-aversion/