“Everything must go!”
“This opportunity disappears at midnight!”
“Don’t miss out! Act now!”
Marketing like this is everywheeerrreee. But should everyone be doing this kind of marketing?
Loss aversion is a principle from psychology that’s captured the imagination of marketers.
Still…in the transition from intense psychology research to selling products, marketers have missed out on some of the important lessons the research teaches.
Don’t get me wrong—loss aversion is powerful. As we’ll see, it often makes sense to use some loss aversion in your marketing.
But there are questions that need to be answered:
- Should you always use loss aversion? Just how effective is it?
- What effect does loss aversion have on your brand (and long-term success)?
- How can you use loss aversion and still stay classy?
If you’re in marketing for any length of time, you’ll eventually have someone tell you to throw in some loss aversion. Add a countdown timer. Build some urgency.
This is when you should use loss aversion marketing—and when it might actually be harmful.
Let’s take a step back. What is loss aversion?
Before we dive into the nuances of loss aversion, let’s start with a definition.
Does this sound like the first day of every history class ever (“What is history…?”). I promise to keep it quick.
Nobel Prize-winning psychologists Daniel Kahneman and Amos Tversky discovered loss aversion during their research on Prospect Theory. The full theory involves quite a lot of math, but the short version is that the theory was intended to model how people make decisions.
In the course of their research, Kahneman and Tversky noticed something odd—people seemed to value a loss more than an equivalent gain.
To illustrate the point, I’ll put you in the shoes of the head honcho at the Center for Disease Control. Here’s the scenario that Tversky and Kahneman presented in a 1981 study.
“Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs are as follows:
- If Program A is adopted, 200 people will be saved.
- If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved.
Which of the two programs would you favor?”
Think about that for a second while I show you the options shown to the other group of participants in the experiment.
“Assume that the exact scientific estimate of the consequences of the programs are as follows:
- If Program C is adopted 400 people will die.
- If Program D is adopted there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die.
Which of the two programs would you favor?”
In the first group, most people picked Program A—they wanted to guarantee that some lives would be save.
But in the second group, most people picked Program D. Even though that option is identical to Program B, which people didn’t like.
Phrasing the decision in terms of deaths instead of lives saved made people change their choices. They didn’t want to lose lives.
In other words, they were loss averse.
The concept of loss aversion has since been studied in a bunch of other ways too.
One famous study, which I’ll call “the mug study,” found that people valued objects they owned more than objects they didn’t own—even if the objects were exactly the same.
If you give me a mug from the campus bookstore (one of the objects studied), then offer to buy it back from me, I’m going to charge you a high price—notably, a price higher than the cost of me just buying a new, identical mug.
This is the “endowment effect,” and is one way that loss aversion can manifest itself “in the wild” (aka, outside of a lab).
Where is loss aversion used in marketing?
With mugs and catastrophic diseases behind us, we have a sense of what loss aversion is. Now we ask—how do marketers use loss aversion?
The answer? Everywhere.
Check your inbox—if you’re on the newsletter for any brand, you’re sure to have some “LAST CHANCE TO BUY” emails in there.
Watch TV. In between reruns of How I Met Your Mother, check the commercials for “limited-time offers.”
Landing pages have countdown timers at the top of the page, to remind you that this offer disappears soon.
An Instapage countdown timer
Online courses have deadline—doors close on Friday at 11:59 pm! Last chance to join. Here’s a countdown timer used in a recent Ramit Sethi email for his course Ready Set Evergreen.
Once you start looking for loss aversion, you start to see it all over the place. Marketers are addicted to it.
And, sometimes, it gets incredible results.
Marketers face a huge challenge. A simple, everyday concept that brutally murders sales and conversions.
As long as someone thinks “I can always do this tomorrow,” they have absolutely no reason to buy from you.
That’s why so many marketers rely on urgency, scarcity, and loss aversion to sell products. A prospect waiting for “tomorrow” isn’t actually saying no to your offer—there’s choosing not to make a decision at all.
When you can make someone feel the pain of not taking action (with loss aversion), you can help them make a decision.
When you use urgency to sell, you take tomorrow off the table altogether.
All of this is to say—loss aversion is a powerful psychological fundamental. People feel losses more deeply than they feel gains. Loss aversion can get them to move when they would normally stand still.
But there’s a problem.
The dangers of marketing with loss aversion
I get a lot of emails from Levi’s. In their defense, I love their jeans.
I just don’t care for their emails.
Check it—on February 19th, they told me it was my LAST CHANCE to get 30% off…
But just 8 days later on February 27th, I could get 30% off again?
On March 5th they say that “You almost missed this…” and that it’s the “final hours to save.” But then on March 14th there’s a two-day sale for 40% off.
Before someone chimes in—I know not all of these sales are necessarily for the same products. Although it only took them until March 29th to offer another sitewide sale for 30% off.
The problem with Levi’s emails? I don’t believe them.
If you say it’s my last chance—excuse me, LAST CHANCE—to get 30% off…and then offer another 30%-off sale a week later, why would I take action on the first sale?
All Levi’s has done is ensure that I’ll never buy jeans at full price. I know there’s a sale coming, so I’m always going to wait for the next discount.
In a paper called The Boundaries of Loss Aversion (that doesn’t get talked about enough), Novemsky and Kahneman pointed out that loss aversion only works when people believes there’s something to lose.
When I get bombarded by a slew of loss aversion messages, I don’t believe any of them. So the loss aversion stops working.
The only thing that’s really happened is a decay of the brand. A loss of trust.
Neuroscience and loss aversion is still an emerging field (as imaging techniques improve), but some research shows that people with amygdala damage don’t experience loss aversion. The amygdala is a part of the brain related to emotional responses, including fear and risk. This research supports the idea that its activation is part of what creates loss aversion.
I don’t want to jump to conclusions based on this research (it’s still young)…but if the amygdala is activating with every loss aversion message you send, over time your brand is going to become associated with fear and risk.
You probably don’t want that, right?
The Levi’s example highlights the extreme that some marketers have taken loss aversion to.
Armed with psychology and case studies about high conversion rates, using loss aversion in marketing seems safe.
But there are limitations to the research, and implications of the research not everyone considers. I don’t want to get too bogged down in journal articles, so here are some quick hits.
- Loss aversion hasn’t been studied over the month- and year-long timelines marketers care about (to understand long-term effects on branding).
- Most loss aversion research measures the effect of loss aversion using money. That doesn’t make the results irrelevant, but it’s worth keeping in mind that marketers don’t usually sell money.
- Any time you sell something, you’re fighting loss aversion—the aversion to spending money
- Loss aversion seems to be stronger for larger losses—and some research has struggled to find the effect for small losses
The most important insight, to me, comes from that same study about the boundaries of loss aversion.
Research shows th