Updated: Oct 24, 2022
Let me tell you a story about my friend Carrie.
Carrie is a full-time worker and a busy mother of three boys. Her schedule doesn’t leave much free time in her day, yet she has made it her goal to incorporate exercise into her daily routine.
Carrie had just enough time to fit in a home workout before helping her boys get ready for school each day. One afternoon, her friend raved about classes at a cycling studio. Carrie agreed to go with her friend on a rare Saturday morning when one of her boys didn't have a sporting event.
The class was enjoyable for Carrie. A large sign listed a current class promotion that would end in two weeks.
Classes normally cost $25 each. Per the current promotion, you could purchase a block of five classes for $59 or 10 classes for $89. If you purchased that weekend, you would get three bonus classes.
Carrie did the math. If she bought five classes with the “extra three” promotion, each class would cost $7.38. If she bought the 10-class bundle that also included the three extra classes, each would cost $6.85. There is no question that the price was a great deal compared to paying $25 per class.
Carrie spent a good portion of the cycling class debating about what to do. If Carrie didn’t buy the bundle, she would lose out on a potential 73% savings. By the time class was over, she had determined that she would regret missing out on the savings, so she bought the 10-class bundle.
Here's an issue Carrie didn’t consider because her fear of loss outweighed other decision-making factors: the classes had to be used within four weeks. Given Carrie's hectic schedule, she couldn’t attend that many classes.
Over the course of a month, Carrie only made it to about four classes, which came out to about $25 a class since she paid $99 in total. She didn’t really get a deal after all, but her fear of loss superseded everything else when she made the decision to purchase.
This is known as loss aversion.
Businesses use fear of loss to their advantage by showing future prices and soon-to-expire promotions. Let’s look at three psychological principles that explain loss aversion in business.
1. We Have a Natural Aversion to Loss
Jimmy Connors, one of the greatest American tennis players, was the world’s number-one player for 268 weeks straight. When asked what motivated him to perform at that level, he simply answered: “I hate to lose more than I love to win.”
Isn’t that true for most of us?
You would be more upset if you lost a $20 bill than you would be excited to find a $20 bill.
Loss aversion is part of a wider psychological concept known as prospect theory, which explains that the pain of losing something is greater than the happiness we feel for gaining the same thing. Losses loom larger than gains.
Loss aversion psychology plays out in a lot of settings, such as when employers motivate employees or when parents motivate their children.
Travel sites take advantage of the power of regret. If you search for a Phoenix hotel on Booking.com, several listings will include the number of rooms left. In a subtle—or not-so-subtle—way, Booking.com is saying that if you don’t book now, you could lose out.
We associate greater psychological discomfort with losses than pleasure with gains. We are, therefore, more motivated to avoid the pain of a loss than to pursue the happiness of a similar gain.
From a business perspective, customers will assign values to anticipated gains of buying and anticipated losses of not buying and react more strongly to the anticipated losses.
In action, this looks very much like Carrie's cycling class. What if she decided to sign up for a membership after the two-week promotion? That would cost her more money.
Once we make a purchase decision, we often compare the actual outcome with what could have been if we chose differently. That is why many companies often show the regular price next to the discount. Carrie was persuaded by this approach.
You might be thinking that loss aversion sounds very familiar to FOMO (fear of missing out). That’s because it is. FOMO is popular in scarcity marketing.
One study looked at FOMO and its impact on purchase decisions. The research involved nearly 300 people. Participants were presented with this message:
“Assume you like (favorite genre choice previously selected) music. Someone posted on (social media platform most used choice previously selected) that several artists will come to your area in a few months for several concert dates. The prices are typical of concerts in your area. You feel you would probably enjoy going to a concert. You have to decide whether or not to buy a ticket and go to a concert.”
Next, participants were shown a message with FOMO:
“Your friends just added posts on (social media platform most used) with photos and videos about the artists and how much fun the concert will be. You think you'll miss out if you don't go with them.”
Then they were shown a message without FOMO:
“Your friends haven't mentioned this and haven't posted any photos or videos or shown any interest on (social media platform most used), so you're not sure if it would be fun. You don't think you’ll miss out if you don’t go.”
The study found that FOMO messages can increase the likelihood purchasing.
The researchers also gave a great suggestion: businesses could use existing customers to pass along a FOMO message, such as, “Tell your friends to join you if they don’t want to miss out.” This advertising message is personal and can boost sales.
Messages that focus on loss aversion or FOMO should also weave in anticipated emotions—such as happiness and excitement—as well as self-enhancement.
Citi took the approach of helping customers overcome FOMO by providing a solution for avoiding anticipated expense regret. It suggested consumers use a Citi credit card to “enjoy now and pay later.” This is quite common among financial service companies and retailers today.
2. Framing the Message Matters
According to the prospect theory, we make decisions based on the potential value of losses and gains, which extends to the framing of a situation. Framing an incentive as a loss can be a bigger motivator than framing an incentive as a gain.
Let me tell you about a study that illustrates this idea.
Some marketing professors got together and decided to test how students would respond to extra credit. The professors used two different classes to see the response to how the extra credit was framed.
In both classes, students would be given optional pop quizzes on assigned readings. If the students chose to take a quiz and answered it correctly, they would earn a point. If they collected five points over the course of the semester, they had a chance to opt-out of the final exam.
If the students took a quiz and answered it incorrectly, then they would lose a point and fall behind in their effort to get to the five points needed for opting out of the final exam. This dissuaded them from making random guesses.
In the first class, the syllabus explained that the final exam was required, but students could earn the right not to take it if they earned five points from quizzes.
In the second class, the syllabus explained that the final exam was optional, but students could lose that right if they did not get five points from the quizzes.
Both classes were required to accomplish the same goal—receiving five points from the quizzes—and their reward was the same—opting out of the final exam.
However, the first syllabus framed the extra credit as a potential gain, while the second syllabus framed it as a potential loss.
Which was more successful?
The message that framed the extra credit as a loss.
Students whose syllabus framed the extra credit as a potential loss were more successful at completing the requisite number of quizzes than those who received the gain frame. Not only did more students achieve the goal of passing five quizzes, but the average number of quizzes taken and passed by students who viewed the extra credit as a potential loss was higher than the number of students who viewed the extra credit as a potential equivalent gain.
Having “ownership” of the right to an optional final made the second group of students perceive it as more valuable than the students who did not have ownership, increasing their motivation to do what was necessary to not lose it.
Businesses that are effective at capitalizing on the existence of loss aversion understand that it all comes down to how framing affects a message. They have to correctly frame a purchase scenario.
3. Regret is Stronger in the Short Term
Our anticipation of regret for missing a money-saving opportunity is why we shop during Black Friday and generally buy things we don’t want or need. This regret is stronger in the short term.
Regret happens when we compare our current choice or action to a preferred, forgone alternative.
A study involved a group of travelers on a South African cruise. They were each given a diary at the beginning of the cruise and told that researchers were studying satisfaction with items purchased on vacation. What they were really studying was regret.
Each day, the tourists were to write down all of the items they purchased or thought about purchasing but didn’t. These items had to be things they would keep rather than gifts. They were instructed to rate their satisfaction, happiness, and regret with each item.
Three months after the cruise, the participants were sent a follow-up survey about the items they purchased. In the short term, participants regretted not purchasing more than purchasing. Two additional studies came to similar conclusions: right after a limited purchase opportunity, those who didn’t buy experienced greater regret than those who did buy.
These findings suggest that when faced with a situation where the purchase opportunity is very limited, the chance of us immediately regretting not making the purchase is high. That could be one explanation for the thriving business of many resellers.
So, how does this all work in action? First, recognize that customers and clients have loss aversion as we all do.
Second, when creating a marketing message—whether for an ad, landing page, or something else—frame the message as a potential loss versus a gain. For instance, show a current discounted price but also the full price once the promotion ends.