What is loss aversion?
Loss aversion is a concept introduced in prospect theory and is best described by the sentence “losses loom larger than gains” (Kahneman & Tversky, 1979). It’s a cognitive bias that states that psychologically losing hurts more than gaining.
People are more willing to cheat or take risks to avoid losing than obtaining profit. That’s why loss aversion is used to explain sunk cost fallacy, which makes people invest in actions that proved to fail. It is also connected to status quo bias emerging when people rather do nothing or stick to the same decision as before.
Losses lead to more intense feelings than gains. We perceive losses as aversive, and we will take action to prevent them from happening or make sure that they are significantly reduced. This results in an asymmetric evaluation of outcomes (Kahneman & Tversky, 1979).
For example, You buy a $10 ticket for the lottery and lose. The next day you buy a $20 ticket, but again you lose. Loss aversion theory states that the potential loss from losing two tickets is greater than the joy of winning 20 times more money by winning one ticket.
Loss aversion can also explain why penalty frames are more effective than reward frames in motivating people (Gächter et al., 2009) and has been applied in behavior change strategies.
We explained more about frames and the framing effect in a dedicated article.
Why is loss aversion important for marketing?
Behavioral economics has been investigating loss aversion for a long time, and now we know it’s crucial for effective persuasion.
When marketers can make someone feel the pain of not taking action, they are able to help them make a decision. And those decisions can help increase conversions, which is why so many marketing campaigns rely on urgency and scarcity.
If you want to learn more about scarcity marketing, check out our article.
The main target for marketers should be to avoid losses in any way possible. It’s all about ensuring that customers don’t lose what they already have and protecting it against any potential negative consequences. The focus on the prevention of losses is usually expressed through savings offers and insurance plans.
Marketing strategies using loss aversion
Here are methods used in marketing and tactics to use loss aversion in your marketing message:
- discounts – e.g., “save up to X%,” “you’re saving X$.”
- coupons – e.g. “buy 1 get 1”
- free trials and product samples – e.g., “try now before anyone else does.”
- pre-ordering options for new products – e.g., “free bonuses.”
- referral programs – e.g., “Share this link and get X$ coupon.”
- communicating urgency or scarcity – e.g., “only X days left on this offer,” “last chance to buy”
- following up on customers with incomplete shopping carts or orders – “You left a product in your cart,” “did you forget something?”
The use of short windows of availability, product shortages, urgent calls to action, countdowns, and deadlines are all effective marketing principles related to loss aversion. To sum it up, here are tips for using loss aversion in your marketing message:
- Frame the offer in terms of loss.
- Make it sound risky
- Offer a comparison
- Inspire the fear of losing.
- Set a time frame.
- State a clear loss.
When Loss Aversion Marketing works and when it doesn’t work
Loss aversion is a psychological concept that caught marketers’ attention. The transition from intensive psychology research to a sell-only product is one example of why marketers might have overlooked some of the key lessons the research learns. It is often necessary with an advertisement to avoid loss aversion.
Loss aversion marketing can give customers an extra push towards conversions and profit maximization. Customers will gain from persuasion techniques as well – by being persuaded to buy, they can avoid loss of opportunity.
As we already stated in our article about scarcity marketing, you don’t want to overwhelm customers with the constant stress of missing out on your offer. Though fear of missing out can be your ally, you don’t want to constantly stress your customers that they are soon going to lose something. Instead, you just want to give them a thrill, a nudge to buy your product.
Loss aversion is a powerful psychological marketing tool. When you can tap into how loss affects your customer’s decision-making, it becomes easier to sell them on the idea of taking action and buying your product or service.
In this article, we’ve covered some great ways to use loss aversion in your marketing message by stressing urgency, appealing to customers’ fear of missing out, setting time frames for offers, framing offers as something that will be lost if they don’t take advantage now (rather than gained), and more!
Remember not to overwhelm customers with constant stress about losing out; instead, give them a thrill or nudge by highlighting what’s at stake when they buy from you today.