How To Use Loss Aversion In Your Marketing To Increase Sales
what everyone ought to know about loss aversion, when it works and when it’s harmful to your marketing.
Individuals (including thee and me) hate to lose.
And this is because losses are intimidating.
So, we all hate to lose…whether it’s a football game, an argument, or our money.
We don’t like losing.
They spring up negative, unpleasant, emotions of pain, fear, and regret. No one in their right mind would ever admit they get a kick out of losing!
Naturally, we try to avoid going through any losses, but our brains have a mysterious way of averting losses and falling into risky situations.
And because decision-making is hard business…people make decisions that are motivated by their desire to avoid a loss.
Now, you may be thinking to yourself that our decision making tends to follow a rational, clear, straight-forward process, but that is just our brain deluding us.
We adopt a less logical route when evaluating our choices.
Take, for instance, imagine you were presented with a 50/50 chance of gaining $150 or losing $100 of your money.
Would you find this gamble fair and attractive? Would you take it?
As with most people, you will try to balance the benefit (psychologically) of getting $150 against the cost of losing $100 of your money.
Now even though you stand a chance to win 50 extra dollars, you probably would dislike it. (I know I would)
And you’re not alone. Most people would too.
For individuals (including thee and I), the fear of losing is much more intense than the hope of gaining something.
It is a type of cognitive distortion that has an enormous impact on marketing and related areas but…
…the key terms here that explain this cognitive distortion are “irrationality” and “Uncertainty”.
Why?
Because people behave irrationally when making decisions, especially when uncertainty plays a role.
And uncertainty increases the likelihood that potential losses will weigh more heavily (about twice) than potential gains…even if they’re of the same exact value.
This phenomenon is called Loss aversion.
Savvy copywriters and marketers know this. They keep loss aversion in mind as they plan their campaigns and write their copy.
In fact…
Loss aversion is one key principle of marketing psychology and if you’re going to use it like the savvy copywriters that do, then you should know when to use it and when it might actually be harmful…
…but before then, you need to understand what loss aversion is.
So, what is Loss Aversion?
Loss aversion is the psychological principle that explains why the pain we feel from losing something is far greater than the positive emotions we feel from gaining it.
In other words, why we feel so much pain losing something than the joy we would have gaining that same thing.
Nobel Prize-winning psychologist Daniel Kahneman and Amos Tversky were the first to discover and study this concept…they discovered it during their research on Prospect Theory.
The Prospect Theory model explains the notion that people will tend to take much greater risk to avoid losing the things that they have than they would have taken to gain them in the first place.
In the course of their research, Kahneman and Tversky studied the impact of loss on human decision-making and were able to confirm their central assumption that:
“…losses and disadvantages have a greater impact on preferences than gain and advantages.”
This lead to their famous quote that “losses loom larger than gains”.
And in the years since Tversky and Kahneman first developed their behavioral theory based on loss aversion…
Stanford University psychology professor Russel A. Poldrack explains that “the brain regions that process value and reward may be silenced when we evaluate a potential loss than they are activated when we access a similar-sized gain”
He added, “perhaps most interesting the reactions in our subject brains were stronger in response to possible losses than to gains — a phenomenon we dubbed neural loss aversion.”
The loss aversion concepts have since been studied in a bunch of other ways too.
In one famous study, called the “the mug study”, psychologist Kahneman and Tversky found that people valued objects that they owned much more than objects they didn’t own — even if the objects were exactly the same.
If I gave you a mug (one of the objects from the study) and I offered to buy that mug from you, you’re going to charge me a high price — notably, a price higher than the cost of me buying a new, identical mug.
This means to say that our assessment of products varies to our relationships with it.
We don’t seem to care about the mug until it’s ours. And this is the “Endowment effect” in action.
I’ll tell you about the endowment effect in a minute, but first, let me explain…
How loss aversion is used in marketing
We all know marketers are all about studying the intricacies of human behavior and psychology and most (if not all) use the loss aversion tactics.
And even you are familiar with loss aversion marketing tactics whether you realize it or not.
They’re everywhere.
“Don’t miss out! Buy Now!”
“Only 2 stocks left! Order Now!”
“This opportunity disappears in 12 hours”
“Available while stocks last”
…and so on.
It’s a principle that’s captured the imagination of marketers. These hard-sell pressure tactics create what marketers call “urgency.”
The morning I wrote this article, I was searching for airline tickets. I wasn’t planning on booking a ticket, I was searching to find a suitable time for me to travel.
I found one, but when I did, I noticed it said: “Last 1 seat” in small red script underneath.
And before I knew it, I booked the ticket on hold.
Urgency plays directly to our desire to avoid loss. And, I didn’t want to miss out because that would mean traveling at a later date.
So, my lizard brain took over and booked the ticket on hold, ensuring that I wouldn’t “lose” what I’d found. Even if I never really had it to begin with.
Note: I proceeded to check out after I finished with this article. Didn’t want to lose it completely.
That is loss aversion marketing in play.
When you can make someone feel the pain of not taking action (with loss aversion), you can help them make a decision. And those decisions can help you increase the conversion rate.
When you use urgency to sell, you take tomorrow or even later off the table altogether.
Loss aversion is powerful and it’s a real concern that taps into the deep insecurities of human conditioning.
People feel losses more deeply than they feel gains and loss aversion can get them to move when they would normally standstill.
But…
There’s a dark side to using loss aversion
As powerful as loss aversion is in marketing, there is a simple concept that murders loss aversion use in sales and conversion rates.
“Tomorrow”
And it’s the reason why so many marketers rely on urgency, loss aversion, and scarcity to increase sales and conversion rates.
Because if your audience think “oh… uhm I can do this tomorrow”, then they have absolutely no reason to buy anything from you.
When you help someone to feel the pain of not taking action (using loss aversion), you can help them make a decision.
You take tomorrow off the table when you use urgency to sell. But there’s a problem with using urgency and loss aversion in marketing.
Take, for example, this email from Levi I found online. I don’t subscribe to their emails and I don’t really care for their jeans but check it out…
You can see that on February 19th, they sent a message saying it’s the LAST CHANCE to get 30% off…
And on February 27th, 8 days later, they’re offering 30% off again.
If you check again on March 5th, you will see a message “You almost missed this…” “Extra 30% off already…” (again) and that it’s the “final hours to save.”
But then again, 9 days later on March 14th, they have a “two days only” 40% off sales.
Now, these sales may not necessarily be for the same products. But the problem with the email is that I don’t believe them.
In this case, when you repeatedly use urgency and FOMO to drive sales… LAST CHANCE to get 30% off this week, another 30% off next week, people pick up and they end up not believing you.
And when they don’t believe you, they don’t take action.
Because, all you’ve done is ensured they don’t buy your product at full price. People quickly pick up when there’s a sale coming, so they will rather wait for your next discount.
Kahneman and Novemsky in their paper titled The Boundaries of Loss Aversion, pointed out that loss aversion only works when people believe there’s something to lose.
What would happen in such an instance is a loss of trust between the audience and the brand.
So, what’s the solution?
Well, what if instead of driving home loss aversion, you could hammer on the benefits of your offer.
Most of your audience aren’t actively saying no to your offer — most are choosing not to decide at all.
The reason why loss aversion works is because it builds tension between what people have and what they want to have.
Research from the Journal of Consumer shows that when someone imagines making a choice, they tend to create an attachment to that choice.
What this means is, you can activate loss aversion without needing to include it in your copy.
My point is…
When you’ve done the work of painting a better future in your audience’s mind, you’ve earned the right to ask them to make a choice.
Copywriter Ry Schwartz drives home this point in one of his blog posts.
You take away tomorrow when you ask someone to make a choice point-blank, where they are faced with the future of their current life or the life you’ve painted for them.
When this happens, loss aversion kicks in on its own because you bypass people’s aversion by painting a life without your product…
This way you get loss aversion working for you.
And, what if also you could make your audience feel like they already own your product.
We’ve seen cases like this where companies offer Freemium packages of their product.
Customers get to use their product and all its benefits for free — within a certain timeframe — and what this does is, it makes their customers more likely to get their product — because not doing so means they most likely end up losing it.
Thing is that people work very hard to get what they have…sometimes they don’t.
But when they get the thing they have, they hate to lose or let it go…even when they don’t possess it and only think of it as theirs.
This is where the endowment effect comes into play.
And if you couple this feeling of endowment with the fear of loss, you can create a powerful hook into the brain.
Magda Kay, Founder of Psychology for Marketers had this to say…
“Because we don’t like losing, once we have something, we don’t want to let go of it (and to top it even more — we value it much more). This is called the Endowment Effect. What it means, is that by making your audience feel they already own your product, they will be more likely to buy it — because not doing so, would mean losing it.”
Just as we’ve seen in the case of the airline example, when you help your audience envision herself already owning your product or using your service, you are more likely to convert your leads into sales.
But remember, loss aversion is a powerful tool you can use to increase conversion rates — only if you use it strategically, understand how it works, know when it applies and when it doesn’t, and watch how your sales improve.
