How “Loss” Can Be a Winning Strategy

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Loss Aversion
Humans: Fear of loss trumps desire to gain.

If I gave you $50 with the following two choices, what would you do?

  • Keep $30.
  • Gamble, with a 50/50 chance of keeping or losing the whole $50.

An experimenter posed that question to subjects, and found that 43% of the subjects chose to gamble. Then the options were changed to:

  • Lose $20.
  • Gamble, with a 50/50 chance of keeping or losing the whole $50.

Same thing, right? In fact, though the dollar amounts are the same, with these options, 62% of the subjects chose to gamble. Expressing the first option as a loss caused a 44% jump in the number of people avoiding that choice! (The purely rational choice, of course, would be the non-gambling option, since the average value of the gambling choice is $25 vs. the certain $30.)

This research, published in Science and described in Dean Buonomano’s Brain Bugs, exhibits two key points:

  • Framing (the way we describe something) has a huge effect on behavior.
  • People are loss averse.

To underscore the importance of loss aversion in humans, the researchers found that over the course of a series of decisions like this, 100% of the subjects gambled more when the other choice was posed as a loss. Although individual variations existed (some subjects gambled a little more, others a lot), it’s quite surprising that every single one was influenced by the way economically identical options were framed.

The Neuromarketing takeaway here is that expressing the outcome of NOT buying your product or service as a loss will convert more potential customers into buyers. If your product can save a customer $100, don’t express that in terms of saving:

  • OK: “Save $100 in energy annually! Buy our furnace gizmo!”
  • Better: “Don’t lose $100 in energy every year! Buy our furnace gizmo!”

Even products not specifically geared to cost saving can use this strategy. One common example: sale prices and discounts can be expressed in terms of “not losing” vs. “saving.”

Non-monetary Loss

While the experiment measured loss aversion and framing in a financial choice, there is every reason to believe that our human preference for avoiding loss carries over into other domains as well. We can lose lots of things – popularity, social standing, peace of mind, good health, sex appeal… Just about every product that delivers a benefit can frame that benefit in terms of a loss.

Here’s a totally self-serving example using the first non-monetary product that came to mind, my upcoming book Brainfluence (Wiley, November 2011). Your choices:

  • Lose thousands of dollars of sales and profit in 2012.
  • Risk $16, pre-order Brainfluence, and try at least a few of the 100 brain-based marketing strategies in 2012.

That’s just one way I could have presented the options. I could also have framed it in terms of “losing money by ineffective ad spending,” for example. Either of those approaches should work better than just promising “higher sales” or “more effective ads.”

I’d never urge marketers to be relentlessly negative in their advertising and sales pitches. But when the opportunity presents itself, framing the alternative to buying as a loss will likely outperform the other approaches.

How can you express the alternative to buying your product as a loss? If you are stuck for an idea, post a comment… Neuromarketing readers are a clever group, and maybe someone will solve your problem!

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44 Comments

  1. Sean says

    If I was to market a room promotion for a Hotel, where the entry level rate would be $1000 , and the client (namely the Hotel) was to say they are discounting the rates from $2000 to this new rate.. How would I word it using this strategy?

    1. Roger Dooley
      Twitter: rogerdooley
      says

      “Don’t lose $1000, book now at our limited-time VIP rate!” seems like one simple way. Adding a prominent expiration date might add some urgency. Any other ideas for Sean?

      Roger

  2. Sean says

    That might work. It is a very different approach to the market. Would be very interesting to see how people would react to such a call-to-action.
    How about this..
    “Don’t waste $1000. Book with us on out limited time VIP rate!”

    Thoughts?

  3. Sean says

    Our product focusses on increasing conversion rate for online retailers. You think it would make a big difference to our sales if we said “don’t lose browsers” instead of “increase conversion rate”?

  4. Margaret J. King says

    The loss-aversion principle is never well enough understood or used in marketing. Human beings are far more loss-fearing than we are attuned to gain. This is the reason that people don’t take risks of any kind without a very real threat behind failure to do so. People want their children to get a college degree not because they think this is an intrinsic good, or a great mental journey, but because they don’t want their children disadvantaged in the job and life market. This is a very big-ticket item and getting bigger every year. Yet schools don’t really market this way (yet); instead they present their offerings just as features (not even benefits) to increase market attractiveness. Just one example of a big ticket sold by features: number of Ph.D.s on faculty, books in the library, buildings, sports arenas, dorm amenities. The truth is that the main selling point of any school is its own student inventory and the quality of connections that can be made from that network base plus reputation value.

    1. Roger Dooley
      Twitter: rogerdooley
      says

      Very interesting perspective, Margaret. I’ve written about college branding here a multiple times, and I totally agree that most colleges and universities miss the boat with their marketing strategies. The top schools, of course, could fill their classes for years to come even if they stopped marketing altogether. It’s the other 3000+ schools that don’t have an established brand that need to think about how to differentiate themselves.

      Roger

  5. Matthew P Block
    Twitter: mattblock
    says

    Great post! I always enjoy your blog, but this one was especially inspiring. I knew well about loss-aversion & it’s effect but hadn’t really though of applying it this way.
    I could instantly see the potential effect for our photography business. Instead of encouraging prospects to preserve memories of young children, I think we’ll start encouraging them not to lose those memories as time passes.

    Your example using your book was great as well. The second option sounds so enticing to me, but I know that the framing from the first line is what really set it up. I’m looking forward to purchasing the book!

  6. denise lee yohn
    Twitter: deniseleeyohn
    says

    very interesting, roger, but this doesn’t sync with the adage advising advertisers to keep away from FUD (fear, uncertainty, and doubt) in their appeals — i’ve always followed the adage, assuming positive, encouraging messages bring appealing associations to the brand, while negative ones create a cognitive dissonance — but perhaps i need to rethink this? — denise lee yohn

    1. Roger Dooley
      Twitter: rogerdooley
      says

      I think it’s a balancing act, Denise. I don’t think ads have to be overly scary or negative. I can’t think of a loss-oriented ad off the top of my head, but look at what Apple did with their I’m a PC/Mac ads. They took a very negative message – “Those other guys want to sell you buggy, unreliable, hard to use software” – and turned it into a something that was humorous and fun to watch. And the Apple came off as cool.

      Roger

  7. Terry Reece says

    For those that may be struggling to understand WHY framing is so important, here is another way to look at this lesson:

    Fear of loss is GREATER than the desire for gain. You want to gain in any given context right? Sure, of course. We all want to gain more. However, the FEAR of loosing ground (something we ALREADY have) is far greater than the DESIRE to gain. IE…gaining is a step forward vs losing is a step back ward! The lesson in the article illustrates how to FRAME a proposition to change PERCEPTION of ownership. When the customer has ALREADY taken OWNERSHIP in their mind, not taking action becomes a loss instead of a gain, hence more people take action under the circumstance.

    1. Roger Dooley
      Twitter: rogerdooley
      says

      Excellent point, Terry. If you can get the customer to hold the item, drive the car, or even visualize owning the product, it will indeed increase the probability of a sale.

      Roger

  8. Robin Jennings
    Twitter: explainafide
    says

    I always enjoy this blog.
    For some reason there has been a massive advertising campaign for death & disability insurance in Australia.

    Really negative advertising such as “From $2 per day you can protect your family”, “what would your family do if you died” All using 30 and 40 year olds for death & disability insurance.

    I will keep you posted as to their future success or if they’re changing tack at all.

    1. Roger Dooley
      Twitter: rogerdooley
      says

      That’s interesting, Robin. Certainly, they are using the “loss” approach. Whether the overall message is too depressing remains to be seen. I think loss can be implied (“protect your family”) , while the stronger message conveys the loss concept forcefully but might be off-putting.

      Roger

  9. Vivian says

    I’m opening a penny auction site and buyers have the following bid options (in Kenya shillings(Ksh)):
    Buy
    10 bids at Ksh20 per bid
    50 bids at Ksh18 per bid
    100 bids at Ksh16 each
    200 bids at Ksh14 each
    300 bids at Ksh12 each
    500 bids at Ksh10 each
    How can I word the savings this way?

    1. Roger Dooley
      Twitter: rogerdooley
      says

      That’s kind of tricky, Vivian. I guess you could compare the savings from a larger purchase to a “loss,” but that seems kind of awkward. Suggestions for Vivian, anyone?

      Roger

      1. Tian says

        “Don’t overpay! Take 500 bids at only Ksh 10 each”

  10. Vivian says

    I know! I’ll focus on the “loss” a buyer would make based on the retail prices of the products I’m selling. EG, “Don’t lose Ksh10,000 on an iPod. Get it at Crazy Duka for Ksh5,000!” I knew this article was for me 🙂

  11. Juliet says

    Very interesting. I wonder how it applies to me as an expressive arts healer and story coach. The first sentence in my home page copy reads: “Experience the healing power of your imagination.” The copy goes on to describe in positive terms what my approach — healing and transformational story — offers. (My thinking has been to give readers an experience of the imagination’s bold, quantum leap power through images and words, and not just information.) How would I reframe this message so that it’s loss-driven but not alarmist?

    1. Roger Dooley
      Twitter: rogerdooley
      says

      These are getting trickier… Juliet, I think fundamentally you are trying to craft an optimistic, forward looking message, but I suppose “don’t lose your mind/body balance” or similar could work. I wonder if encouraging visualization might be a more powerful tagline than “Experience the healing power…” Something more like, “Imagine perfect health…” In other words, emphasize the end goal vs. the process.

      Roger

  12. Juliet says

    Hmm, definitely interesting. I like the concreteness you suggest. This helps. Thanks, Roger.

  13. trent says

    My company collects and analyzes wellness data. We then sell reports for $500 to organizations looking to improve their wellness programs. I’ve historically used a strategy of “spend $500 to gain the knowledge necessary to improve your program.”

    How would you recommend I go about selling?

    1. Roger Dooley
      Twitter: rogerdooley
      says

      Trent, for most companies health-related costs are an enormous black hole. They pay for costly health insurance premiums (and more for actual costs if they are self-insured), they have productivity loss due to illness and injury, etc. I’d put the $500 in the context of the magnitude of expenses related to employee health. “The average business spends $6,232 per year per employee on health related costs. For $500 total, our wellness study can cut that by helping you improve the health, well being, and productivity of your employees.” (That number is totally invented, I have no idea what it is.)

      Roger

  14. Page says

    What really interested me about this problem is that 43% choose to gamble even in the “keep” condition, even when the net present value is so clearly lower. Do you think it is the presence of the “$50” number in the gamble condition?

  15. Roger Dooley
    Twitter: rogerdooley
    says

    Page, maybe some people are inclined to gamble. State lotteries often pay out at a low rate, making them a statistically bad bet, but sell lots of tickets. The amount may influence the decision, too. Plenty of people might risk $3 for an even chance to win $5, but not many would risk $3 million (or even $1 million) for an even chance of $5 million or nothing.

    Roger

  16. Samui says

    Great article, will be trying this in our next ad campaign. Would love to get your book but Kindle not available.
    Please let me know when it is.
    Samui

    1. Roger Dooley
      Twitter: rogerdooley
      says

      Thanks, Samui. I guess for some reason you can’t preorder Kindle versions. When the paper version launches, the Kindle version will be available too (along with other e-versions).

      Roger

  17. Raquel Hirsch says

    Great article – as usual. This has inspired us to create conversion optimization hypotheses around web page headlines so we can test (with real, live web visitors), how well this can work.

    In other words, we have isolated “expressing the first option as a loss” to determine if this single change has an impact on lead-gen conversion rates.

    (Conversion Optimization is the process that enables online managers of lead-generation and ecommerce websites to maximize the percentage of web visitors that become leads or customers through planned and ongoing online testing. That iw what we do at http://www.widerfunnel.com)

    Once the test Round completes, I will share the information with your readers.

    1. Roger Dooley
      Twitter: rogerdooley
      says

      That would be awesome, Raquel. At least, it will be awesome if it confirms the thesis of the article! 😉

      I’m a huge believer in testing – situations are never identical, and just because an orange button boosts conversion on someone else’s site doesn’t mean it will do the same on yours. I’m looking forward to your results!

      Roger

  18. Raquel Hirsch says

    You got that right! (“just because an orange button boosts conversion on someone else’s site doesn’t mean it will do the same on yours”).

    The ONLY way to know for sure what works for any company’s website is to test — that is why we tend to disregard “best practices” (nobody has a crystal ball) and use insightful findings such as yours to create hypotheses to test.

    Raquel

  19. cono_sur
    Twitter: cono_sur
    says

    Fantastic post! Will definitely be trying these techniques.

      1. mike says

        This post is cosmically outrageous!

        I sell nutritional supplements through a continuity based program.

        It is cheaper overall for the client to purchase a year at a time rather that month to month.

        For example….it is 31.90 for it to be sent every month and if the bought a year it would be 280 a year….rather than 31.90 times 12 which is $382.80.

        How can I incorporate a strategy of selling to the client using loss aversion? What would be a good phrase?

        1. Roger Dooley
          Twitter: rogerdooley
          says

          Mike, I see two possible “loss” strategies. For selling the product, you could emphasize loss of health, vitality, etc. To upgrade a customer to a larger purchase, you could try something like, “Why lose $8 every month… buy a year’s supply now!” The danger, though, is that the customer might start thinking of the whole expense as an avoidable loss. I’d be cautious and start with an A/B test of alternate offers.

          Roger

  20. John Young says

    Just started into the neuromarketing world and believe I understand the basic concepts in a basic way. My problem comes with translating the concepts of loss or “going negative” into my selling world. I am working on a presentation for seniors from 65-80 yrs. I sell annuities. Many seniors are needless exposing their investments to risk of loss because they are in stocks. Annuities have always been a means of protecting a certain sum of money so that the holder can have a guaranteed source of income if they need it. With all the uncertainty today, loss and fear are easy to talk about with them. My confusion here is how much loss do I demonstrate without alienating them but at the same time causing enough pain to induce them to protect what they have and get out of their comfort zone? Thank you in advance for your help.

    1. Roger Dooley
      Twitter: rogerdooley
      says

      Good question, John. I think you can sell the loss aspect softly. Right now, anyone who is invested in the stock market is aware of the big daily price swings, the uncertainty of the future with the debt crisis in Europe, etc. Contrasting the lack of volatility of an annuity investment with the scary aspects of stocks should be straightforward. I don’t think you need to paint a picture of your clients eating pet food after a market crash wipes out their savings. I’d also focus on the financial backing of your products and inflation protection, if any. Good luck!

      Roger

  21. Astro Gremlin says

    Roger, fear of loss is more motivational than excitement at the prospect of winning. Limited time offer. Don’t miss out on the savings. Black Friday only comes once a year. Funny creatures, these humans.

  22. Justin says

    How could I reframe selling Final Expense Life Insurance. People buy it for three reasons (from order of importance)
    1. To save their loved ones the burden of paying for a loved ones final expenses i.e. funeral, cemetary, bills, showing etc.
    2. To replace an income for a spouse so that they don’t need to suffer a decline in standard of living.
    3. To leave a legacy to their children/grandchildren/church/charity

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  26. John Hewitt says

    It’s a sad day when experts miss the point of their own blog an advocate the wrong message. Your suggestion to one of the first comments with regards to marketing the hotel room shows you don’t really understand loss aversion bias nor the principles of marketing. For one, the most important aspect for loss aversion bias is the perception of ownership as one of the previous pointed out, saying you are going to lose $1000 if you don’t book a room is quite simply just ridiculous and not only would mean a lost sale, but also loss of future business because of halo bias (horns effect).

  27. Clare says

    How could I use the fear of loss most effectively when marketing regular charity donations? Namely direct debits to support a certain charity for ideally 12 months!

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