Human Cognition – Use Loss Aversion
for Effective CX Communication
We humans are highly averse to perceived loss. Use this when communicating.
Classical economic theory proved wrong
Many people on your teams and ours have studied economics. Classical macro- and micro-economics courses are full of graphs that purport to show trade-offs. Trade-off between price and quantity is one example. Trade-off between salary and vacation time is another.
Classical textbooks start from the basis that humans are rational economic actors. Those books are wrong.
The emergence of that combination of psychology and economics that came to be known as behavioral economics was a pivotal moment. Kahneman, Tversky and similar thinkers demonstrated that human cognition works in ways that are far less rational than those shown in economics textbooks.
It soon emerged that loss aversion is one of the most powerful psychological motivators in the economic sphere.
You are far more motivated to do the fire-fighting than the rest.
We love the experiments that show the power of loss aversion. They are highly relevant to CX communication, whether internally or with customers.
Think about this simple experiment that was done with a large set of oncologists. The question asked was how willing they would be to prescribe a new medicine. The descriptions provided were identical except for one sentence. Half the doctors were told that the expected first-year survival rate was 90%. The other half were told that the first-year mortality rate was 10%. This is identical information, framed differently.
What happened? 80% of the first group said they would be willing to prescribe the new medicine. Only half the second group would. The only experimental manipulation was that one group was told about a potential gain, the other about a potential loss. That’s loss aversion in action. A negative like this is usually much more powerful at driving behavior.
Another simple experiment has been repeated dozens of times. Half of a university class is given coffee mugs with the logo of the university. They are then given a form asking at what price they would be willing to sell their mugs. The other half of the class gets to inspect the mugs. On a form they indicate at what price they might be willing to buy one of the mugs.
Time after time, the result of the experiment is the same: the sellers want twice as much as the buyers will pay. The sellers have the mugs. Because they have them, they mentally assign a higher value to them. They are less willing to give them up than buyers are willing to acquire them. Another example of loss aversion.
Use this when communicating
Today you have acquired customer X, worth $500k. But today you have also lost customer Y, worth $500k. Are you happy or sad?
Personal relationships aside and all other things being equal, the dollars say you should just shrug and move on. But if you are a typical human, you’re not happy. Today is more about losing Y than gaining X.
The value to your company of gaining a customer and of losing a customer of the same size should be equal. Rationally, it is equal. In our minds this is not at all the case. Your colleagues, and indeed you yourself, are far more attached to the customer you already have than the customer you could have.
Extending the coffee mug example, you should expect your leadership team to be willing to invest (against financial logic) at least twice as much to keep an existing customer as to acquire a new, identical customer. Even as you read this you may be saying “Of course! That’s obvious!” to yourself. It may be obvious, but how often is it rational?
This is one of the NPS challenges
In our experience of involvement in over one thousand corporate CX initiatives we have seen this phenomenon again and again. We are confident that you have seen it too, whether you use NPS, CSAT or some other measurement and improvement system.
Your leadership, and perhaps you personally, are far more motivated to do the fire-fighting to recover Detractors than to commit the possibly much lower effort and investment to increase the number of Promoters. And remember, Promoters are the people who will both spend more and spread the word about how great you are.
It makes no sense at a rational level, and it is a huge communication challenge. Any discussion you launch about increasing the proportion of Promoters may get side-tracked as soon as you mention a customer who is having a major problem.
We have only found one foolproof solution. You may not like it.
Don’t mix the discussions
The only way to avoid a CX presentation or investment decision deteriorating into a pure fire-fighting discussion is to avoid discussing the two categories of customers at the same time.
Present your insights about what improvements are needed to motivate Passives to become Promoters this month. You can use loss aversion. Use it only when discussing the associated risk of Promoters becoming Passives if you do not make the proposed investments while your competitors do so.
Next month you can have an entirely separate discussion about Detractors and how to recover them. Let your leadership team’s and your own loss-aversion tendencies run wild at that point.
But do it now! Don’t miss this opportunity!
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