Loss aversion is a cognitive bias where the emotional impact of a loss is felt more intensely than the joy of an equivalent gain, meaning that people tend to try to avoid losses in whatever way possible.
Loss aversion is a foundational part of Daniel Kahneman and Amos Tversky’s prospect theory. Prospect theory explains that people evaluate potential losses and gains relative to a reference point, usually the status quo. Their research showed that losses are twice as powerful compared to their equivalent gains. Simply put, if you found £10 in the street, you’d probably be happy but if you lost £10 in the street, your disappointment of losing your money would far outweigh the joy of finding it.
Loss aversion is a cognitive bias that skews decision-making. It impacts not only financial decisions but also choices in areas like health, relationships, and career.
Here’s where it can be applied to marketing strategies:
Price Framing
Marketers might use loss aversion to frame prices in a way that highlights potential losses. For example, ‘we can save you £100 on your bills each month’ is framed as a gain but ‘you’re losing £100 every month on your bills’ is framed as a loss. People are more likely to act if you show them what they’re losing by doing nothing. When you’re speaking to risk-adverse audiences, like health and finance, this works even better.
Influencing Consumer Behaviour
Promoting free trials and limited time offers to influence how consumers behave is also an example of loss aversion. Companies offer free trials to reduce the perception of loss associated with paying for a service upfront. Once consumers have used the service, they may perceive losing access as a loss, making them more likely to continue with a paid subscription.
Products can also be marketed using scarcity using limited time offers or limited editions. This can be more effective than framing the potential gain as the heightened sense of potential loss makes people more likely to purchase quicker so as not to miss out.
Loss aversion is a powerful force in behavioural psychology that shapes our decision making. By tapping into the human tendency to avoid loss and using it in your marketing strategy effectively, you can influence more people to buy your product/service as consumers are more likely to invest if you show them what they’re losing, not just what they’re gaining.