When people think of product management, they think of building and maintaining great products that customers love. Terms like agile and MVP, sprint and user journeys, and SWOT analysis get thrown around often, but what about the aspects of product management that are harder to grasp?
Some concepts can’t easily be measured by data analysis or conducted materially on a spreadsheet. Loss aversion is one of these. In this article, you will learn what loss aversion is, how it impacts your product, and how you can overcome it within your team.
Loss aversion is the psychological concept behind the human response that attributes more to losses versus gains. Studies show that people feel the negative effects from a loss nearly twice as much as they feel the positive effects from an equal gain. For example, the loss of a $100 bill is twice as painful as stumbling upon and gaining a $100 bill.
Negativity, fear, threats, and loss all have a much higher impact on the human brain than gains do in order to protect and save you from losing the resources we need to survive. Think about it this way, do you ever have survival instincts that take over the body when you find a new application you enjoy?
Whether dealing with loss aversion from the customer or from your colleagues and managers, you need to better understand loss aversion and how it manifests in your work in order to overcome it.
I have two words for you: switching costs.
Yes, change can be hard, but when driven by enough pain, customers should be willing to adopt new solutions that better help them reach their goals and provide value to them. But, through the lens of loss aversion, you can see that not only is change a difficult obstacle, the potential loss of an established product is weighted more than any new solution others have to offer.
To overcome switching costs, you need to make sure you’re offering a solution that will not only relieve pain points, but also provides the psychological safety required for customers to make the change.
Customers may know their current methods aren’t working, but the fear of switching and losing the devil they know can seem too risky. It’s easier to dwell on the negative. Therefore, you have to deliver the value of your product, show proof, and focus on how much the gains outweigh the risk of loss.
Along with the bad, there are opportunities to use loss aversion for good too. The risk of loss, the sense of scarcity, and general FOMO are all behaviors that can be used in order to influence consumer behavior toward your product.
There’s an ethical line of course. You don’t want to fill your customers with fear. People aren’t stupid and you can lose trust by doing this. Instead, you can ethically motivate people to try new things by relying solely on building trust, showing value, and gaining customer investment.
Through limited-time beta programs, pilots, or free trials, you can offer your solutions at no cost beyond the customer’s effort. Limited time trials can create scarcity and FOMO to attract customers to use your products and then cause customers to invest time with your product.
Anything that allows your customers to interact with your products will create a sense of loss for them if they decide to abandon it.
Loss aversion comes up the most with insurance and investing. Both markets feed directly off loss aversion by providing products and services that protect them from extreme loss.
For example, insurance companies are built solely on the fear of losing your house, car, spouse, health, etc. In order to protect themselves from this possible loss, consumers can purchase insurance that will result in monetary coverage if a loss takes place. This market works particularly well due to the high costs of medical care, housing, and vehicles.
On the other side, investment markets such as the stock market, housing market, etc. also heavily involve loss aversion. The devilish combination of FOMO and loss aversion is why people often go against logic to sell low and buy high. That innate fear of losing out on something is so high, any logical or rational reasoning is thrown completely out of the window.
Now that you’ve seen how loss aversion plays with the customer, how does loss aversion affect decision-making in the workplace?
It’s all about the Benjamins. Like the loss aversion experienced by customers, businesses also fear the loss of money. It requires risk taking and money to build valuable products that stand out from the crowd, but loss aversion creates a fear of spending (or losing) that money.
When executives experience loss aversion, projects are placed on hold, employees get let go, and overall psychological safety gets damaged. Time and time again, companies will let go of UX or product resources to cut losses temporarily, only to have larger losses down the line.
Consistently playing it safe, going with what you know, and avoiding hard things does not protect you from loss.
Although loss aversion is inevitable, there are strategies that you can employ to minimize its effects among your customers and team:
Overcoming the fear of loss is made much easier if you actually talk. Talk to customers, talk to colleagues, talk to executives, and talk to partners! You learn a lot about the people around you, their needs, and fears when you have meaningful conversations with them.
In regards to product development, it’s easier to take risks when you break things up into smaller, testable chunks so you can learn and get feedback quickly. This is a far safer way to build and release products because it takes less monetary investment and you can learn, grow, and pivot quickly.
Understanding the addressable market for your products can also be a helpful tool to use when getting executive buy-in. It’s easier to take a risk if you know the potential money that could be made. Gathering data related to the market, direct prospect feedback, competitive intelligence, and more can help ease the minds of those investing in building the products and relieving the blind fear of loss.
While loss aversion impacts everyone, it doesn’t have to hold you for ransom. Learning the root causes of what makes people afraid of losing can help you overcome these obstacles and provide better user experiences, marketing ideas, and methods for developing products.
But remember, at the end of the day, even if there are tangible losses to building products and taking risks, every single choice, decision, feature, conversation, investment, etc. is knowledge you have gained for your next venture.
Featured image source: IconScout
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