Loss Aversion in marketing
I’ll start with what I consider to be true:
Marketing is always about addressing one person: a consumer, an investor, the assistant to VP sales or everyone in between
For the most part, people make decisions based on instinct or emotion.
Rationale comes in later to justify the decision.
So, if people are not rational, how do we strategize a rational marketing path when it comes to influencing them?
We search for order amid the chaos. We seek patterns in what is irrational but consistent and can be explained. This is the realm of behavioral economics - a branch of knowledge that serves as the basis of our award-winning venture, The Perspective, and the secret sauce in our outsourced marketing activity at RAVNER.
Of the many principles that behavioral economics has unearthed and defined, there is one that comes up often and proves to be a highly effective marketing tool. It’s called Loss Aversion. The general idea is that losses are more painful than gains are pleasurable. In other words, we would rather spend energy on avoiding a loss than on gaining the same profit. Or, simply: “It is better to not lose $5 than to find $5” (as stated on Wikipedia, where you can review this principle’s origin, and related research and implications).
Paying for plastic shopping bags
Examples of Loss Aversion:
It’s more painful to lose $2000 that could cover rent than to earn $2000 to go on vacation.
We don’t find the time to vaccinate when vaccinations offer “better health.” However, we swamp clinics if we believe that vaccinations can prevent declining health.
Do you know how local supermarkets charge a small (annoying) fee for plastic bags at checkout? Here’s the idea behind it: NYU research studied “the effect of two similar policies aimed at reducing disposable bag use: a five-cent tax on disposable bag use and a five-cent bonus for reusable bag use. While the tax decreased disposable bag use by over forty percentage points, the bonus generated virtually no effect on behavior. These results are consistent with a model of loss aversion.”
The above explains why speeding tickets and current fines for not wearing face masks are ultimately better at getting the job done.
Applying for apps
So, how do we apply the principle of loss aversion to marketing?
When discussing the value of our product or brand, we highlight the potential loss (for not using it) more so than the potential gain (for using it). For example:
“Save XX dollars when buying the premium plan” converts better than “Earn XX dollars when buying the premium plan.”
A 30-day money-back guarantee (if you don’t like the product) works because once you have the product, you are less likely to give it up. Doing so will feel like a loss.
When we created the landing page for Bigabid, we used two different post captions:
“Find users that would give your app the love it deserves” didn’t convert as well as “Did you know, your app’s greatest fans may still be unaware of its existence.”
When we released the (first version) of Sealed’s website, we A/B tested a version with and without the stats. The page displaying that “87% of leads are not recorded and managed” showed significantly longer average page sessions.
Why (some) startups fail
Expanding back to strategy, I also think loss aversion is a part of why many startups fail. Here’s my reasoning:
We are raised on the assumption that great startups are opportunistic – we see a slightly open door and push it right open. In reality, though, chasing opportunities more often than not means a loss of focus and resources. And yet, it’s hard to give up on opportunities because loss aversion makes it feel like we’re giving up magnificent potential. Experience shows, however, that a slightly open door is sometimes better off shut completely so one can continue on the path we were walking before the opportunity presented itself.
Entrepreneurs and investors often say that a key issue in their career is having a hard time knowing when to quit. This is because walking away from something that you’ve invested time and money in gets loss aversion to work in full force. The result may be staying at it (whatever it may be) longer than we should.
Therefore, next time you’re at a crossroads and need to make a tough decision, acknowledge your own loss aversion. While this principle might not change your decision, it may help you make a better informed one.