We work hard to avoid loss: How to take advantage in comms and pricing
We work hard to avoid loss. Harder than we do to find gain. This discovery won a Nobel Prize in 2002 for Daniel Kahneman and Amos Tversky for their Prospect Theory: It’s that significant. So why don’t we use it more?
In most cases we don’t use it at all. Or if we do it’s not knowingly. There’s two simple ways to use it: Price structure, and communications.
If you have a product that can save someone money, don’t say that. Our motivation to save is not as great as our desire to avoid loss. So talk about the loss to be avoided, instead.
“This loft insulation will save you £200 per year.”
[Thinking] So what?
“This loft insulation will stop you wasting £200 a year.”
[Thinking] I’m wasting £200 a year? Every year? Right now? *Klaxon*
Communication is deeper than a poster or a TV ad: every point a consumer has contact with you is an opportunity to communicate.
In fact, not so much an opportunity as a given – it’s up to you to do something with it. Or ignore it. (But do that at your peril.) So what about loss aversion and price structure?
In some coffee shops you can get a discount for bringing your own mug. Most people who do this prefer a Thermos cup. But this isn’t going to drive behaviour efficiently, because we know we don’t work hard to secure gain. The price structure should be turned on its head by embedding the discount in all prices (as if the bring-your-own-mug brigade were the norm), and add extra for those that want a disposable cup.
Instead of: £2 for coffee (£1.70 with your cup)
Flipped to: £1.70 for coffee (£2 with disposable cup)
No one gets charged any more, or any less. It might look like a tax on paper cups, but it’s not. Simply, the pricing is positioned differently. One could derive this conclusion using Query Theory or Anchoring but Loss Aversion tends to drive the most concise and precise solutions.
Its discovery did win a Nobel Prize, after all.
Maybe these businesses in the Brixton area should try my alternative coffee pricing strategy?
‘Kahneman & Tversky’s (1979) “Prospect Theory: An analysis of decision under risk” is the second most cited paper in economics during the period, 1975-2000 (Coupe, in press; Laibson & Zeckhauser, 1998).’ Wu, Zhang and Gonzalez (2004)