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How to Overcome Loss Aversion to Boost Your Performance Marketing

1170 818 Chris Wilson

Have you ever bought something from eBay or a similar site? If so there’s a good chance you witnessed the effects of loss aversion first hand. You probably came across someone who massively overpriced what they were selling. Sometimes to the point of being more expensive than a brand new item. This is that psychological principle in action and understanding it will help you skyrocket your advertising and performance marketing.

In this article, you’ll learn

  • What loss aversion is
  • How it impacts advertising
  • How to overcome the negative aspects of loss aversion
  • How to use loss aversion to enhance the appeal of your products

What is Loss Aversion?

Loss aversion says that people are more worried about losing what they have than getting something extra. It’s basically summed up in the old expression “a bird in the hand is worth two in the bush.” We’d rather not lose $5 than gain $5 dollars.

It’s what the whole insurance industry is built on and it’s why contestants on “Who Wants to Be a Millionaire” will avoid “risking” losing what they’ve won rather than continue, even if they are certain they know the answer.

Daniel Kahneman discovered this phenomenon when he ran an experiment giving one set of people a mug and another nothing. He then asked both groups to price the value of the mug. Those who were given the mug priced it higher than those who didn’t have it.

The act of owning the mug made them value it more than if they didn’t own it.

What does Loss Aversion Mean for Performance Marketing

There is both a positive and a negative aspect of loss aversion for your advertising.

The negative implication of loss aversion is that prospective buyers will focus on the potential risks of a purchase and will give them more weight than the potential benefits. The implication is you need to make sure you assure potential buyers that the risks aren’t something to worry about. You need to provide evidence that the risks are or non-existent (or at least low). Just showing possible wins and gains is not enough.

This is the sort of information that is great on a landing page. Here you can provide key information about your product and counter common fears, worries, and misconceptions.

However, there is also the positive aspect of loss aversion for your marketing. You can also use loss aversion to enhance the appeal of your product and not just seek to avoid the negative influence. In addition, you can also encourage people to avoid missing out or a negative event. So “don’t miss out” or “avoid (something negative), get our product”. This can work in both your initial advert and/or on your landing page where you can show both the benefits of your products and the dangers of missing

Now let’s look at some practical ways to overcome the negative aspects of loss aversion as well as how you can enhance your performance marketing with the positive aspects of loss aversion.

A badge promising a no risk guarantee for a customer. The outside changes between pink and purple colors. This badge helps to overcome loss aversion.

1. Trials

Offering a trial is also a really powerful way to hook customers. It helps overcome their fears (there is no financial cost!) and once someone is signed up, loss aversion works on your side. Instead of people worrying about whether or not they should try your product, people now wondering if they can live without it.

Now sometimes you can’t offer a free trial of your product but when you can offer a trial, you are providing yourself with a really powerful psychological tool.

2. Money back guarantees

If you can’t offer a trial, another option is a money back guarantee, a classic of many sales. The money back guarantee.

This, again, is a great way to overcome loss aversion as there is nothing to lose. From a customer perspective, it might as well be a free trial in another form, but in reality, it’s not. What actually happens in many cases is that customers can’t be bothered by the effort of getting their money back, they don’t bother applying even when they aren’t satisfied. In fact, due to “selection bias” — where we value something more because we chose it — a customer may trick themselves into being satisfied with a product that is lacking.

3. Outcome bias

Have you ever made a decision that seemed like a bad one, but eventually everything turned out okay so it didn’t matter? Well, that’s outcome bias or survivor bias. We judge events based on the final result not whether the same or better would have happened via a different route.

This can work well with loss aversion. By showing testimonials of customers who used your product, you are showing the benefit they gained, helping to overcome loss aversion and highlight the risk of not choosing the product. Outcome bias comes into effect as we believe the testimonials to be true and a result of the product because they were successful. There are two other factors we can use to enhance our testimonials.

a. Appeals to authority

Have you seen those celebrity endorsements for sports products (or just about anything really)? Well, that’s an appeal to authority. It’s using their expertise to lend authority to our product. In reality, their claim has no extra strength than anyone else, but if an expert likes something, we assume they must have tried it out properly.

If you know of a high profile customer for your product, see if you can get a testimonial from them regarding your product.

b. Social proof

You don’t have to use authority figures to create a powerful testimonial. There is also social proof which uses the fact that we want to fit in with everyone else. If there are two ice cream shops, one with a large queue and another with no queue, which do you think is better? Sure you might still choose the no-queue shop because it’s convenient, but we’ll “know” that the best ice cream is in the other shop.

In our advertising, using testimonials from regular users helps the potential customer envision themselves using the product. But there are other tools we can use like reviews and even software which shows information about recent sales like Holler box for WordPress and Sales Pop, a Shopify addon.

One last important factor to note is that using testimonials and images from people of similar demographics is much more powerful. If you can properly segment your traffic then you can optimize your landing pages for specific demographics and devices users.

Two Ice cream shops that look very similar except one shop has a "get one free" promotion and a longer line outside it. An example of social proof overcoming loss aversion.

4. The Scarcity Effect

Have you ever noticed how some companies always seem to be running a limited time sale…in some cases, it’s almost impossible to find a full price product. This is because these companies are trying to leverage the scarcity effect. Basically, we want things more if we are worried that we won’t be able to get them in the future. It’s a primal instinct as we seek to gather the limited resources around us and if we see something is running out, we priorities getting it now. Basically, we want to avoid the potential loss.

You can use this by offering limited time offers, showing a countdown until a product goes away, or listing how few items there are left. All of these will introduce a sense of scarcity and fear of missing out which can help drive a conversion.

Conclusion

Loss aversion is a really powerful psychological influence that can both hinder and help your marketing efforts. If it is properly considered and implemented then it will work for you and aid your efforts. But ignore it and you are imposing a high barrier for customers to summit.

Luckily, we have a range of tools and tricks to help us stay on the right side of loss aversion.

Key Takeaways

  • Loss aversion means we worry more about losing what we have than gaining something new
  • Loss aversion can hold people back from sales or it can help drive sales
  • Testimonials, especially from authority figures and people similar to the customer help calm fears
  • Free trials and Money back guarantees are really powerful ways to overcome loss aversion
  • Running limited time sales can help provide the final push a customer needs.

Chris Wilson

Content Writer at Codewise.com, helping revolutionize the ad tech industry.

All stories by:Chris Wilson