Don’t Lose Out!!

man-hanging-on-keyholeIf you have opened this article, then my experiment has worked!

I am leveraging something called loss aversion.

I was reading about loss aversion and the endowment effect and came to the realisation that we in organisational change management or indeed anyone trying to communicate and engage to get buy-in to a change or improvement initiative, can leverage the way in which marketing exploit these behaviours.

Before we explore that exploitation, let’s look at what loss aversion and the endowment effect are.

 

Loss Aversion

Loss aversion was identified by Amos Tversky and Daniel Kahneman.

Loss Aversion refers to the human tendency to strongly prefer to avoid losses to acquiring equivalent gains. This implies that someone losing $100 will lose more satisfaction than another person will gain satisfaction from receiving $100.

This explains why many of us make the same irrational decisions over and over again in an economic sense.

We go to the movies and 10 minutes into the film we decide we don’t like it but we still stay to the end as we are adverse to wasting money by not watching it.

We maintain a gym membership but don’t go to the gym but cancelling seems like a waste of money.

If we have spent money – however small like a gym membership or large as millions of dollars spent on a programme of work that’s not having the desired outcomes – we are inclined to stay the course as not to waste what we have already spent.

Most of us have witnessed projects that we know are going nowhere and wondered why. Put it down to loss aversion!

We don’t want to feel the loss of what has already been spent and therefore and carry on in the hope that there will be a gain. In most cases it is just further loss.

Endowment Effect

Loss aversion explains the idea of the endowment effect, which is the tendency for people to place a higher value on something they own than on an identical thing that they do not own.

In the 1970s economist Richard Thaler identified the endowment effect. It explains our irrational tendency to overvalue something just because we own it.

coffee-cupsIn 1990 he teamed with Daniel Kahneman and Jack L. Knetsch to conduct an experiment involving Cornell undergrads and coffee cups. They distributed coffee cups to half of the students but left the other half empty handed. The former group estimated a selling price and the latter group a buying price. Would the students with coffee cups ask for more? This is exactly what the researchers found – the undergrads with cups were unwilling to sell for less than $5.25, while the ones without cups were unwilling to pay more than $2.25-$2.75.

So How Do Marketers Exploit Loss Aversion and Endowment?

Upfront Analytics describe 4 ways that I have summarised here along with additional commentary.

Scarcity

Ever been shopping online for clothes? You choose your size and colour and all of a sudden a pop-up appears saying ‘Hurry – only 2 left’. This is marketing exploiting loss aversion at its finest!

The message is designed to make you feel anxious and therefore you are more likely to buy to avoid missing out on the item you want.

Ownership

Marketers exploit the endowment effect by creating a sense of ownership. When a person feels like they own something, they are more likely to hang on to it as theirs.

Ever see something like this? Of course you have!

money-back-guarantee

This is a marketing strategy, which not only removes the risk of buying but also creates ownership with the purchaser. When the 30 days is up, sending the item back feels like a loss and the purchaser is more likely to keep the product. At the end of the day, they have already paid for it so it is theirs.

Other ways of increasing a sense of ownership are:

  • Using a language that infers that the person already has the product.
  • Using a video showing someone using the product. When our brains see someone doing something, it assumes it is us. So watching someone else use a product makes us think it is us using it.
  • Giving away samples.
  • Letting people imagine having your product by using words such as ‘picture’, ‘imagine’ and ‘visualise’.

 
Sense of Loss

Outlining a sense of loss leverages the loss aversion concept. This involves making a person feel a sense of loss if they don’t make a purchase. This is often done by not just offering one product on its own but offering it alongside two inferior products. By highlighting the weaknesses in the inferior products the purchaser associates it with an increase in quality of life and therefore not purchasing would be losing out on something that has obvious advantages.

This can also be done by use of language. Rather than saying ‘Save $20 when you sign up to Service X’, say ‘Lose $20 every month you are not using Service Y’.

If a product is a time-saving product, the message should be that customers will be losing time if they don’t purchase it rather than saving time if they do purchase it.

Free Gift

Imagine you are at the supermarket and you are buying a bottle of shampoo. Your favourite brand is having a promotion. One bottle has 20% off. Another is the regular price but comes with a free travel conditioner. Loss aversion tells us that despite the price of the gift being less than the discount, we are more likely to choose the bottle with the free gift. This is because we don’t want to miss out on the chance to get a free gift – whatever the value.

So, How Can We Borrow from the Marketers?

There are many ways we can leverage how marketing use loss aversion to their advantage. Here are a few ideas.

Scarcity

Let’s imagine you are launching an improvement initiative. It could be a change in process or technology.

hurry-upYou are running a webinar or training course to raise awareness and educate in order for your initiative to be a success. You want people to register.

You send out an email with a link to the event. When someone clicks on the link to find out more you can launch a pop-up that says ‘Hurry – only a few places left!’

 

Ownership

Use video showing someone following a new process or using new technology.

Let people imagine following a new process or using a new technology by using words such as ‘picture’, ‘imagine’ and ‘visualise’.

Sense of Loss

Consider using ‘lose’ as opposed to ‘gain’ in communications.

For example, rather than ‘Using this revised process will save you 2 hours in your day’ say ‘By not using this revised process you will lose 2 hours of your precious time each day’.

Consider saying ‘If we don’t use this new technology we will lose customer satisfaction with our service’ as opposed to what we would usually say – ‘If we use this new technology we will increase our customer satisfaction’.

Conclusion

The biggest challenge is breaking the habit of thinking about gains when we are formulating communications. We also need to ensure that we understand our ‘consumers’ and are able to pair them with right communication strategies. For those that understand loss aversion, doing so can create huge gains.

Loss aversion is a concept, which is not without controversy, if you wish to explore it more, but the theory is widely accepted.

My only caution would be to use it carefully. Don’t incite fear. Focus on offering constructive information to help people through their decision process. Provide a compelling reason for them to take action.

If you use it too much you will dilute its impact and people will become fatigued by the message. Think about those ‘closing down’ sales and the business is still in operation 12 months later!! The loss has to be real and well-timed.

I end with words from Daniel Kahneman who sums up the whole principle as: “Losses loom larger than corresponding gains.”

 

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