You are in the boardroom pitching a deal to the board, and explaining how and why the ROI will be strong. But they hesitate.
You highlight the benefits to the organisation. The value from the deal is clear. It makes rational, logical sense for them to sign off. But they hesitate.
Later, an email arrives informing you that they will be giving it more thought and get back to you.
What just happened?
You’ve just experienced the “Loss Aversion Effect”, a phenomenon that emerges when fear of loss is more powerful than anticipation of gain.
The loss aversion effect works like this: imagine you’re offered an opportunity on the toss of a coin. Heads, you win $150. Tails, you lose $100.
Most people don’t take this gamble because the fear of loss is more powerful than gaining $150.
So why is the fear of loss so much more powerful than the motivation to gain a reward, even when the reward is obviously higher? A lot of it comes down to the instinct to avoid risk and pain. The hunter-gatherer that took risks didn’t last long. Cautious hunter-gatherers who did not take unnecessary risks survived … and here we all are as a result!
Our response to fear has never left us, our primal brains still overreact to fear of loss. This overreaction in the brain prevents us from thinking straight. A client will generally have to think a little bit longer about what they will gain from your proposal, but they will understand what they stand to lose far more quickly. It’s as if they can’t help themselves.
But loss aversion effect works both ways: you can also use it to control a prospect’s attention.
Here are some examples of the loss aversion effect in play:
- When properties are auctioned, as a bidder starts to bid on the property and a competitive bidder joins, you will often see the first bidder quickly increase their bids as they don’t want to miss out.
- A car salesman offers you a deal that they say is a one time offer which will be withdrawn you if you leave the dealership. So now you don’t want to lose the deal.
- We tend to hoard things that we don’t need for years, yet we won’t throw them out.
- A study conducted by the University of California, Santa Cruz involved salespeople from a power company selling free energy audits to home owners. Half of the owners were told ‘If you insulate your home, you’ll save X dollars per day’. The pitch was reversed for the other half who were told ‘If you don’t insulate your home you will lose X dollars per day’. Both of these statements are the same, yet the ones that were told that they would lose were more motivated to take action
The takeaway for salespeople: when presenting, show how your solution will prevent losses, then present what a prospect stands to gain. In negotiation this is called framing. It’s important that you frame your numbers in a way that the client understands the potential loss more than the potential gain, especially when summarising at the end.
As salespeople we are inherently focused on solving problems and are taught that if you tell the client what they will gain they will be easier to close. Unfortunately, the brain doesn’t work that way!
Remember, too, that more audience attention will be devoted to evaluating information about potential loss than information about the potential gains. This happens even when the gain is pretty much the same as the loss.
It also means that when presenting your proposal against a competitor, telling your prospect company what the competitor does not provide is powerful – you’re telling them what they might lose!
Be aware that how you present information will impact on how you influence the perception, which is where you win deals.
Pancho Mehrotra is the principal and founder of Frontier Performance, and uses a wide range of disciplines to advise on psychology in sales and optimise professional performance.