Loss Aversion in Marketing and Business: For those of you who are regular readers of this blog, you’ll know that one of our most popular and most visited topics is that of consumer psychology and how we can utilise this in marketing – for good, not for evil!

Loss aversion is a powerful psychological phenomenon which small business owners (in fact, businesses of all sizes) should be aware of, and can utilise. First, let’s begin by outlining what loss aversion is.

What is Loss Aversion?

In short, loss aversion describes the tendency in most people to favour avoiding losses over acquiring gains. In the real world, it suggests that most people will derive less pleasure from winning £500 than they would derive suffering from losing £500. A paper from Amos Tversky and Daniel Kahneman has suggested that the effect is twice as large for losses – i.e. it hurts twice as much to lose £500 as it feels good to win £500.

Loss Aversion in Marketing

Utilising loss aversion in marketing is actually fairly simple – and is utilised by larger companies all the time. For instance, a free trial of Netflix costs the consumer nothing (hence it’s free!) and so is a relatively easy sell for the company – “Try it for 30 days, if you don’t like it, just cancel your subscription.”

However, loss aversion is at play. After 30 days and, if film consumption is anything like my house, tens of films having been watched, customers are used to having the access – it has become part of everyday life. By cancelling the subscription, the customer is losing the instant access to hundreds of films and potentially adding complication (do they rent a film, scroll through TV channels etc.).

Because there is no additional effort involved in signing up – another clever element in the design of the Netflix proposition – many customers will simply stay with the company, because to lose access to their favorite films is more powerful than the effect of ‘re-gaining’ their £10 a month. In addition, moving the point of payment to a month after having experienced the product, moves the barrier posed in loss aversion terms – i.e. the loss of £10. Most people are poor at predicting their future decisions, and will tell themselves they will cancel within 30 days.

Moving forward, a few ways you can think about loss aversion in your own marketing would be as follows:

• If you offer a subscription based product, the above case study is a good one – try offering free trials
• Think about loss aversion when designing marketing messages – i.e. traditionally communications might say “Earn ten pounds a month by switching to our new current account – potentially try “Lose ten pounds a month, for every month you’re not with the Bank X Current Account’
• If you’re product is a time saving service, then re-enforce the fact that customers will be losing time by not moving to your product

One thing that you may ask is why doesn’t losing cash offset the aversion in the Netflix example? It certainly does – losing £120 is certainly more of a pain than gaining £120 is. However, again, Netflix do a good job of making use of another couple of psychological elements. Firstly, the cost of £120 (annually) is staged in £10 intervals – as humans we struggle to quantify the long-term, we think in short term affects. Second, because the transaction takes place online, via direct debit for instance, we never see the physical cash – again lessening the impact of the loss. And finally, as mentioned above, the actual loss is disassociated from the product itself by giving away a month of access for free – the process of weighing the value of £10 against the value of access to movies is moved away from the point of signup. We’ll discuss each of these in later blogs.

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