Sales Conversion from Loss Aversion

You just spent a great long-weekend in Las Vegas with your friends.  You went to fabulous restaurants, went shopping, and of course did some gambling at the casinos.  If someone on the street gave you the choice between $50, no strings attached, vs. flipping a coin for the chance of winning $100, what option would you choose?  In spite of both options being numerically the same, most people would choose the $50.  This is an example of the phenomenon of loss aversion.

Loss aversion is defined as people's tendency to strongly prefer avoiding losses to acquiring gains.  A study conducted by Daniel Kahneman found that the statement “if you buy our product, you will save $100 per year” is half as powerful than the statement “if you do not buy our product, you will lose $100 per year”.

Most studies have found similar results, that losses are twice as powerful mentally as gains.  This opens the door for opportunities to marketers.  They can express an outcome is a loss frame instead of a gain frame.  Some examples include:

• Free trail:  once you’re used to a product or service you grow accustomed to the luxury of it. The likelihood of you sending it back, which could be a hassle, is slim. An example is a free month trial of a Shark vacuum.
• Wording: Instead of emphasizing what a consumer will gain from an offering, emphasize what they’ll be missing out on if they do not purchase an offering.  For instance, The General’s commercial “Don’t overpay for auto insurance!”
• Luring them back: If your local Yogurtology has a punch card where you get the 6^th yogurt free, you’re more inclined to return to Yogurtology.  Why would you pass up something “free”?

It is human psychological nature.  Once we have something, we surely do not want to surrender it.

The Power of Priming

We’ve all fallen victim to it.  A McDonald’s commercial comes on and the juicy cheeseburger and crispy golden fries that appear on the screen before us has us in a trance.  We make a late night run to go get that Big Mac we’re now craving.

An experiment conducted in 2009 at Yale University was performed in order to see if exposure to food advertising during television viewing might contribute to automatic snacking of food.  This was done specifically on elementary-school-aged children.  The children watched a cartoon that contained either food advertising or advertising for other products and received a snack while watching, and the results were staggering.  Children consumed 45% more when exposed to food advertising.  It’s no wonder that American scientists have found that obesity in children increases the more hours they watch television.  In 2012, $4.6 billion was spent to advertise fast food. This speaks volumes on how influential priming in marketing can be.  

Priming is when exposure to one stimulus can affect how you respond to another stimulus. Priming can be used in all sorts of ways.  It can range from a type of music played in a clothing store to the type of font on a sign.  With the power of priming, markers can influence your subconscious and change your perception without you even knowing it.

A Hankering for Anchoring

Back in the mid 70s the psychologists Kahneman and Tversky recognized what is known as the anchoring heuristic.  Just as a refresher, a heuristic is a mental short-cut humans use to simplify decisions.  The anchoring heuristic is the notion that people have the tendency to base their decisions off the first piece of evidence they receive. This is a huge opportunity for marketers to exploit. The following three methods are the main anchoring techniques marketers employ to increase sales:

• Initial Price Setting: The current price is perceived as inexpensive relative to the initial price.  
• We’re online shopping on Michael Kors.com and suddenly we notice there is a thick red line crossing out a price of a hand bag. Right beside it, there is a new lower price.  The handbag that used to cost $300 and now is on sale for $215.  We can’t afford not to buy! We’ll feel that we are “getting away” with something.  Whereas, if the original price was $215 we may bypass the handbag, feeling it is out of our price range.
• Multiple unit pricing: This is a strategy where the customer perceives quantity buying equating to greater savings.  
• If a customer was walking through the isles of a grocery store and came across a large Frito-Lay’s display with a sign that read “4 bags of chips for $2”, the customer is much more inclined to buy instead of if the sign reads “50 cents per bag of chips”.  Although they are the exact same value, the multiple unit pricing is more appealing.  The customer uses the number four as the anchor.
• Purchase Quantity Limits: Customers see the number limit as a guide for how many to purchase.  
• We are buying paper towel and see a sign reading, “limit 10 per customer”.  Although we may be inclined to believe this cap off is to protect the store from losing profit, it is actually there for the purpose of readjusting the anchor of our brains.  Multiple studies (including those performed on Campbell’s soup) have proved this method increases the average number of items purchased per customer. 

Although the content isn’t any different, our perception on if we’re getting a “sweet deal” is based off the how the marketer presents or positions the product or service.  

We Care if its Rare

We are sitting relaxing on our coach on a lazy Saturday morning flipping through the T.V. channels.  Suddenly, we hear a man announcing, “ Only the next twenty callers will receive this special one-time offer! Time is running out”. We have an immediate tendency to feel we may be missing out on some valuable opportunity.   This is an example of scarcity.  Stemming from the principle of supply and demand, the more rare something is, they more value it’s seen to have.  In 1975, a study was conducted to see how scarcity altered people’s perception of things. The study asked participants to rate the cookies 1-10.  Half were asked to rate a jar with 10 cookies and half rated a jar with 2 cookies.  The cookies from the 2-cookie jar were rated twice as high as the cookies from the 10-cookie jar.  This study shows how strong the psychological premise of scarcity is. 

How Marketers can benefit from scarcity:

•  Increases perceived value: Demand of something can depend on how the scarcity is positioned.  If a product used to be plentiful, but due to popularity it became scarce, the principle will be more effective than if there was a scarce supply from the beginning. 
• More impulsive buys: If consumers feel they will miss their chance unless they act at a very moment, they will most likely make rash decisions. They might choose to purchase something immediately that if they had the time to consider all the pros and cons they would not have.

Whether it’s a hotel booking website informing you that only 2 rooms remain available, or a seasonally offered pumpkin spice latté at Starbucks, we as consumers are effected by scarcity in marketing. 

Reciprocate to Syndicate

We’ve almost all found ourselves out to dinner at Olive Garden at one point or another.  You’re absolutely stuffed from your “Italian” dinner, but your waiter or waitress brings your party a generous pile of Andes mints along with a smile and your check.  Unless you hate chocolate and mints, you’re instantly put into a good mood.   Will you be more inclined to leave a better tip?  The concept of reciprocity is that if someone does something beneficial to you or for you, you instinctually want to return the favor.  Robert Cialdini, a psychologist at Arizona State University who studies how human behavior is affected by social rules, reported that if there is a mint on a tray with a check, the tip was 3.3% higher than usual.  If there were two mints on the tray, servers received a 20% higher tip.  This speaks volumes about the power of reciprocity.

How can companies utilize this social phenomenon?

• Free apparel/items-handing out T-shirts or mugs at an event with your printed logo on it.  Not only will they be wearing/using these items promoting your brand, they’ll feel indebted to your company.
• Free trials-get consumers to try your product for free. They’ll feel appreciative. If you provide them with a positive experience, they’ll be hooked!
• Free Knowledge-share your insights with potential customers on your blog.  If your knowledge benefits the reader, they’ll not only have respect for you, they’ll provide their email or other contact information to receive later blog updates.’

There are plenty of ways to utilize the principle of reciprocity in marketing, and it does not have to be expensive.  But remember, we must give something away BEFORE we ask or expect someone to return the favor.