Loss Aversion

Imagine this…

It’s the start of the month, so it’s time to catch up on finances.

As usual, you’re looking through your spending to stay on track. Your eyes get a little bigger when you see your credit card bill. 

You spent more than you’d hoped. As you cruise through the list of transactions, you start noticing a lot of subscription charges.

You count a total of TEN subscriptions. That’s *way* too many, you decide.

In a moment of unattachment, you decide to cut out 3: including your Amazon Prime Membership.

Now is a better time than ever, right? You navigate to Amazon and find the cancellation button. You still feel confident and excited to get rid of these monthly charges.

Practically in robot mode (and partly thinking about what you want for dinner), you go through the cancellation process. Click, click, click, and then a pause.

Amazon calculated how much you would have spent on delivery fees in the past year — $350. Thanks to your Prime account, you didn’t have to spend any of that.

Do you still cancel your membership? 

In today’s edition of Why We Buy, we’re taking a look at Loss Aversionwhy we prioritize avoiding loss over creating gains.

Let’s get into it…

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The Psychology of Loss Aversion 🧠

Psychologists Amos Tversky and Daniel Kahneman realized that people are innately risk averse.

When people find $20 on the ground, they feel pleasure.

When people lose $20, they feel the loss with an emotion that’s 2x more powerful than that of pleasure!

Our brains prioritize avoiding loss.

Unsurprisingly, Loss Aversion really kicks in when it comes to finances. 

We’ve all experienced this over the past few years… seeing our investments balloon higher than we’ve ever seen before.

And…watching them catapult back down. 🫣

Which emotion stuck with you the longest — the pleasure of seeing your investments skyrocket or the pain of losing money?

That’s Loss Aversion at work.

Inside Your Buyer’s Mind 🧐

As your buyer assesses your offer, their mind is hard at work piecing together what’s at stake.

Even if your product is 100% guaranteed to give your customer the desired outcome, the power of Loss Aversion might keep them from making a rational decision.

This is why it’s up to you to eliminate any perception of losing money associated with your products (even if it means giving them away for free… for a little while).

The ultimate Loss Aversion industry is estimated to hit $7 trillion in 2022. This industry is so big that I’m 100% certain you’re paying into it. Have you guessed it yet?

Insurance is the greatest example of Loss Aversion in action.

The entire value proposition of insurance is to ensure that you don’t lose what you already have.

Customers will pay tens of thousands of dollars in insurance over a lifetime, hoping they never need to use it.

That’s how powerful Loss Aversion is.

How To Apply This 🤑

Alright, so how can we apply this right now to sell more.

Let your customer test-drive

Free trials and demos are a terrific way to de-risk the decision for your customer. Making the decision to buy a product is a lot easier when there isn’t a loss tied to the choice. Better yet, free trials show your buyers how great life is with your product and makes it harder for them to want to remove it from their lives.

Free trials are common in the software world but trials have proved very helpful in other realms too. For instance, DTC mattress company Endy recognized that many people were nervous to buy a mattress online. They mitigated this fear by offering a 100 night free trial.

Now buyers can try an Endy mattress with nothing to lose. And once they become accustomed to sleeping on their new mattress, they won’t want to lose those benefits.

Highlight specifically what’s at stake

People hate feeling like they could be losing money. They hate it even more when you can show them how much they could personally lose. If you want to avoid losing customers, show them what’s at stake..

Amazon uses personalized Loss Aversion messaging to discourage people from canceling their Prime memberships. Phil Agnew shows the difference between the two messages. One is drastically more powerful than the other.

Give your customer incentives to act

Loss Aversion is just as much about de-risking your offer as it is showing your buyers what they’re losing by not having your product or using your services. Make it clear what they’re missing out on and then make it sludge-less for them to opt-in.

Give your customers early bird access or offer limited quantities to reward those ready and eager to take action.

The Short of It 💥

Offer trials, pain-free refunds, and early access so your customer feels there is no way for them to lose. 

Ensure that the downsides are eliminated and the upsides are continually enforced. When possible, make all decisions reversible (especially ones involving their hard-earned money). 

Until next time, happy selling.



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Written By Katelyn

Katelyn Bourgoin is the CEO of Customer Camp, a 4X founder, and a cheese lover. She lives by a simple mantra: whoever gets closer to the customer wins.

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