Loss Aversion: Solution for 99 Problems, but B2B Ain’t One

Loss Aversion: Solution for 99 Problems, but B2B Ain’t One

When Amos Tversky and Daniel Kahneman published their groundbreaking paper on Prospect Theory in 1979, little did they know that a particular phrase from the paper would capture the popular imagination. Today, loss aversion is known as the most important idea conceived in behavioral decision-making. It supposedly reflects a fundamental truth: humans are more motivated by fears rather than aspirations.

I first realized that the principle of loss aversion had escaped from the economics vernacular and seeped into pop culture when I saw 2018’s escapist rom-com Crazy Rich Asians. In the movie’s opening scene, the lead character drops heavy references to it in an economics lecture. Before that, I only heard about it from new marketers who read about the principle in a book by some Seth Godin clone. From what I’ve found, a majority of these marketers:

a. Read about the principle,

b. Form their definition from a substandard, keyword-stuffed article,

c. Apply it (a bit lousily) in any campaign they put out.

I’m not denying that loss aversion is a powerful principle. 

It often makes sense to use some amount of it in your messaging. My problem is how it is used: in a generalized way for all kinds of marketing. In particular, many B2B marketers bombard their target audience with a slew of loss aversion without putting a lot of thought behind it. As an additional bonus, the bombardment turns their prospects desensitized to it.

To understand why loss aversion is not a great device in the B2B marketing toolbelt, we must first establish its precise meaning. While the principle is based on the idea that the pain of losing something is stronger than the pleasure of gaining something else – it’s not an all-encompassing definition.

Loss Aversion and Marketing

The pop-culture definition of loss aversion: ‘losses hurt more than equivalently sized gains’ – isn’t precise. This particular sentence is one of the concepts of diminishing marginal utility. Loss aversion inclines more towards the theory of reference dependence, which says that an individual’s utility function (preference for goods and services) is impacted by their reference point.

A lot of marketing and sales literature conveniently ignores this. There is a two-part pattern that I’ve noticed in the marketing books that mention the principle:

  • One, almost all books on loss aversion assume it to be a fundamental principle that can be generalized. Nearly all peer-reviewed studies about the principle suggest that it is contextual in nature.
  • Two, every author who mentions loss aversion in their marketing or sales book completely overlooks that it is not a specific psychological process. It describes just an area, not the entire consumer behavior.

As stressed by nearly every major study, everything boils down to reference framing (reference point combined with a set of directions). It has been proven time and again that it is more important for marketers to frame the situation rather than blindly using loss aversion. 

B2B marketing has minimal overlap with these specific contexts, areas, and situations. There are two significant reasons why loss aversion doesn’t work with B2B:

Reason One

In their groundbreaking thesis, ‘The Boundaries of Loss Aversion’, Kahneman and Novemsky confirm that the principle only works when people believe there’s something to lose. So, if the situation is framed in a way that emphasizes loss:

  1. Those who have a lot to lose immediately may be interested.
  2. Those who do not have a lot to lose may not be.

This is the very reason why it works brilliantly in the type of marketing that is characterized by the following:

  1. Product-driven approach
  2. One (or two) decision-maker(s)
  3. Short cycles
  4. Emotional appeal

AKA, B2C marketing.

What about B2B?

B2B marketing is usually characterized by the following:

  1. Relationship-driven approach
  2. 6+ decision-makers
  3. Long cycles
  4. Rational appeal

B2B buying process does not involve a single person picking from an aisle or clicking a button to confirm a purchase. It is a complex web of rational buyers with different motivations. In an environment like this, it is extremely difficult to tap into anxiety for the sake of a quick sale. Moreover, there’s a typical pattern in all the studies that promote loss aversion: none have been studied over months or year-long periods, which are the standard B2B cycles.

Reason Two

In B2B, most of the decision-makers do not spend their own money. 

A research paper titled Economic Decisions for Others: An Exception to Loss Aversion Law by Mengarelli et al. investigated this. They ran an experiment to see if the risk preferences of decision-makers differ when the reference point is no longer their own money but somebody else’s. In that experiment, participants made three monetary-risk-based choices by making decisions for themselves, and then for others. Results showed that loss aversion bias was significantly reduced when participants chose on behalf of others compared to when choosing for themselves. 

In B2B, you’re usually marketing to people choosing a service for their business. They may have personal KRAs that may relate to the services you offer. But, they are making decisions for the company and not themselves. This diminishes your loss aversion tactics on them.

Loss aversion is an incredible tool for conversion rate optimization when used in the proper context – and sparingly. It is proven and works brilliantly in B2C. But if you’re selling to businesses, your prospects are smarter, have more time to think – and are less incentivized. Hence, you cannot exploit the bias in B2B.

Loss aversion has solutions for 99 problems, but B2B ain’t one.

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