Apr 22, 2021 • Podcast

How does loss aversion impact customer decision making?

In this episode, Paul explains how loss aversion will influence the customer’s decision to buy.

Show Notes:

Losses loom larger than gains. Therefore, we will focus more on what we give up versus what we gain. 

Think of a 401K; you are saving money today for a long-term, future benefit. It’s painful to give up that money today. 

You place a higher value on what you give up today than what you could potentially gain in the future. 

Loss aversion is real, and here is how you overcome it…

 

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How does loss aversion impact customer decision making?

(Transcribed from podcast)

On today’s episode, we are going to talk about loss aversion. This is a topic we have discussed in the past, and here’s what came from it. I was on a virtual conference just the other day, and we had a Q & A session at the end of the conference. And a salesperson asked, “How do you get people past what they have to give up and sacrifice?” And I started talking about loss aversion and the salesperson said, “Okay, well, what is loss aversion? How does it impact decision making?” So that’s what we’re going to talk about today: How does loss aversion impact decision making?

Before we get into that though, a quick shout-out to our sponsor, Andrea, over at The Creative Impostor Studios. The podcast now is teetering on the edge of being downloaded in almost 70 countries, which is amazing. It continues to grow. We continue to be a resource for the sales community, and a large part of the reason behind that is because of the help of Andrea’s team and what they do for us over at The Creative Impostor Studios. So reach out to her. If you need some help starting a podcast, even if your own company wants to do a podcast. I see that happening a lot. Some of my bigger clients, they have an internal podcast that they will use as a way to communicate with their team. Very clever. Andrea would be happy to help out with that. So if you’re interested, just give her a call. She’ll walk you through what it looks like and it doesn’t have to be as hard as we make it. We’re going to have a link over to her website on this episode’s webpage.

Also, in Value-Added Selling, we have an entire chapter dedicated to the psychology of decision making. So pick up your copy of Value-Added Selling wherever you get your books. Value-Added Selling is available at Amazon, Barnes & Noble, 800CEOread. Pick up your copy. It’s available wherever you get your books.

All right, let’s get back to that question: How does loss aversion impact customer decision making? We need to explain loss aversion, but I think it’s important that we put it in context that we understand.

My wife and kids and I were getting ready to go on vacation. On this vacation, I booked the airfare using my points from the airlines. And, you know, I don’t know what it is, but I love to hoard those points. I don’t like spending them and giving them up. It’s because I’ve collected them. I’ve got several hundred thousand miles and I just did not want to give them up to book the flight. Although it’s not real money that I’m paying for these flights, but I didn’t want to give them up. It’s like I was proud of my collection or something like, you know, the movie Up In The Air and I didn’t want to give them up.

And the reason why I didn’t want to give them up because losses loom larger than gains. And this is taken from Daniel Kahneman, his book, Thinking, Fast And Slow. He’s the thought leader on loss aversion. And he talks about that as why we hate giving things up, like in this case, me giving up those airline miles. Although, we’re going to have a great trip, that’s part of it, but I just don’t feel like giving them up. And that weighed heavily on me. That is because we focus more on what we give up than what we actually gain. That’s loss aversion in a sense. And if, I could answer that salesperson’s question, who said, “How does loss aversion impact decision making,” well, it impacts decision making because your customers are more focused on what they’re giving up than what they’re standing to gain.

So they don’t like giving up their resources. When you have a customer, let’s say you’re presenting a solution to that customer and the solution is going to cost them $10,000. That’s something they’re going to have to give up in order to gain your solution. Now your solution might create more value in the long run, but that’s in the future. What they have to give up is today. And not only that, there are other things that they’re sacrificing today. They’re having to change what they currently have. And they don’t want to give up that either. They don’t want to give up the time it’s going to take all that stuff. They don’t want to give that stuff up.

So to get them past that, you need them to think in the long term. You need to stretch their time horizon, ask questions that transport that buyer into the future. Because, people, they just don’t like giving up their resources.

I’ll give you an example. So I have a salesperson who sells 401k services to large companies, companies that offer their companies a 401k benefit-type of deal. So he’s working with those companies. He said one of the challenges, once they sign up a new company and they take over their 401k plan, is getting the younger people to participate. He said, “You know, you get those employees that are in their twenties, we’re asking them to contribute money every month to something they’re not going to experience any gain [until] 30, 40 years from now.”

He said, “So what we have to do is we have to get them past what they’re giving up today.” And how he does that, he asked them to imagine what the perfect retirement would look like. He’ll hold a, you know, a company conference meeting, whatever it may be and say, “I want you to imagine what your ideal retirement would look like. What does it look like? Imagine what you’re going to be doing, where you would like to be financially.” And it’s pretty clear what he’s doing. He’s getting them to think into the future, bypassing what they’re giving up today to where they’re actually going to experience the reward. That’s what we do to get past loss aversion. That’s part of it.

Another thing with loss aversion, people, they don’t like to give up what they currently have. And this is true of old habits that we have. It’s true of, for example, investments that we hold, we tend to hold on to them too long because we don’t want to give up what we have. Airline points, as I mentioned. People don’t like giving up what they have because they own it. It’s theirs. The act of giving it up means that they’re losing something. Although they could be gaining something greater, that loss, it weighs heavily on them.

You know, something also interesting—this will be the last point talking about loss aversion. When people are going to experience a loss, they’re willing to take on more risk to avoid a certain loss. And there’s a great example in Daniel Kahneman’s book, Thinking, Fast And Slow. He talks about risking and gambling and all that good stuff. You know, when people are ahead and they’re gambling, they’re less likely to take a risk. But as they start losing, they’re willing to take on more risks to try to make up for it. Because when we know there’s a guaranteed loss, when we’re going to lose something, we’re willing to take on more risk.

Here’s how that might relate to decision making, especially in, you know, in the business-to-business context. If you have a customer—let’s say they’re buying software systems. Let’s say the premium software option—the premium option—is a million dollars. That’s what they’re going to have to pay. The substandard option, the one that’s kind of in the middle, that’s $800,000. So $200,000 less, 20 percent less—a significant amount of money. And there’s a 20% differential there. It’s a significant amount of money. That customer is going to look at it and they’re going to say, “Okay, I know that the premium option will completely meet our needs. It’s the best. It’s what we need. It’s perfect for what we’re trying to do, but it’s $200,000 more. You know, I’m willing to take a risk just to save that $200,000. I’m going to be willing to risk not being completely satisfied just because I’m going to have to give up $200,000 more than the next best option.”

And what they’re doing is they’re using risk. They’re going to say, “Okay. Yeah, it’s riskier to buy the less expensive option. But for me, the way I feel with loss aversion, that extra $200,000 I’ve got to pay, that’s even more painful than the risk that I’m incurring to buy that other option.”

So, when we think about loss aversion and how it impacts decision making, it’s something we’re constantly going to have to weigh. It’s going to weigh on our customers. And as salespeople, our goal is to get the buyer past what they’re losing and focus more on what they gain. And that means focusing on the future, long-term outcomes that they’re going to gain.

And it’s also about highlighting the risk. And sometimes if you have a customer who’s willing to take a risk to buy a cheaper option, we need to point out that their decision may even lead to a greater loss than the loss of paying a little bit more. It’s really a delicate balance when we’re trying to sell to our customers, and we bring loss aversion into the mix and all that.

But hey, those are just a couple ideas. We can take loss aversion, we can understand it, and hopefully get past it when we are out there selling to our customers.

Make it a big day.

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