How to Use Prospect Theory in Ecommerce

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Ever wondered why some customers hesitate at the checkout while others rush to buy as soon as they see a “limited-time offer”? It’s not all about price or product quality—human psychology plays a major role in how people shop.

One key psychological insight is prospect theory, a concept that explains how people perceive gains and losses and why certain marketing messages hit home harder than others.

This theory is a cornerstone of behavioral economics, which integrates factors such as emotions and cognitive biases that influence individual decision-making.

If you want to understand how to make your ecommerce site more irresistible to shoppers, prospect theory is a powerful tool to have in your arsenal.

In this article, we’ll discuss how prospect theory works and, more importantly, how you can use it to build an ecommerce experience that nudges your customers toward checkout.

Let’s get started!

What is prospect theory?

Prospect theory, developed by psychologists Daniel Kahneman and Amos Tversky, explains how people make decisions when faced with risk or uncertainty.

According to this theory, people don’t perceive gains and losses equally. In fact, they’re generally more sensitive to the idea of losing something than they are to gaining something equivalent.

This insight has huge implications for ecommerce because it affects how consumers respond to discounts, scarcity messaging, loyalty programs, and more.

Key concepts in prospect theory

To fully leverage prospect theory, let’s break down its main concepts and see how they influence consumer behavior.

1. Loss aversion: Why losses feel bigger than gains

Loss aversion is a foundational idea in prospect theory.

Essentially, losing $10 feels worse than gaining $10 feels good. The emotional pain of losing is greater than the satisfaction derived from an equivalent gain. In other words, people are more motivated to avoid a loss than to make a gain.

In ecommerce, this means customers are more likely to take action to avoid missing out on a deal than to score a benefit they didn’t have before.

2. Reference points: The benchmark effect

People evaluate gains and losses relative to a certain “reference point.” This could be the original price of a product, the regular price of shipping, or even a competitor’s pricing.

When shoppers see a high original price crossed out next to a discounted price, their reference point shifts, making the deal seem like a significant gain.

3. Diminishing sensitivity: The more we get, the less we notice

Diminishing sensitivity means that as the size of a gain or loss increases, each additional unit feels less impactful.

For instance, customers may feel more excitement about a $5 discount on a $20 item than on a $200 purchase.

This effect is why tiered discounts can work well to encourage additional spending—they capitalize on the initial excitement of a smaller gain.

Why prospect theory matters in ecommerce?

Understanding prospect theory can help you connect with customers on a psychological level.

It enables you to design offers, messages, and experiences that align with how people naturally make decisions.

By playing into people’s aversion to loss, their reference points, and diminishing sensitivity, you can shape perceptions and encourage conversions without resorting to heavy discounts or gimmicks.

How to apply prospect theory in your ecommerce store?

So, how can you practically apply prospect theory in your ecommerce strategy? Here are some actionable strategies:

1. Leveraging loss aversion

To put loss aversion into action, you’ll want to create a sense of urgency that prompts customers to act fast. Let’s look at two powerful ways to make the fear of missing out work in your favor.

Scarcity and urgency tactics

“Only 2 left in stock” or “Limited-time deal” messages are classic examples of loss aversion in action.

Amazon conversion copywriting example

When customers feel they might miss out, they’re far more likely to make an impulsive purchase to avoid regret. 

Creating urgency by limiting stock or timing offers to a short window leverages this powerful psychological effect.

Cart abandonment emails

Abandoned cart emails with messaging like “Don’t miss out!” or “Items in your cart are selling fast!” tap into loss aversion by reminding customers of what they’re leaving behind.

Highlight the urgency of their potential loss—like missing out on limited stock or an expiring discount—to nudge them back to complete their purchase.

Cart abandonment email example

Recommended reading: 60+ Abandoned Cart Subject Lines to Recover Sales Effectively

2. Using reference point for pricing

Pricing isn’t just about setting the right number—it’s about setting the right perception. By using reference points effectively, you can make your pricing feel like an unbeatable deal.

Here’s how anchoring and strategic comparisons can elevate your pricing game.

Anchoring effect with discounts

When customers see a discounted price alongside the original price, that original price serves as a reference point. Suddenly, the discount feels like a gain. 

Showcasing high original prices or even using a “compare at” feature makes the final price feel like a significant win, increasing the appeal of the offer.

Cross-selling and upselling

Presenting a higher-priced option as a reference point can make a mid-tier product look like a better value. 

This is common in upselling strategies, where a premium product is shown first to establish a high reference point, making the less expensive options seem like great deals by comparison.

3. Framing to influence perception

Sometimes, it’s not what you’re offering but how you’re presenting it that makes all the difference. By framing offers as a gain rather than a discount, you can make them feel more rewarding.

Let’s dive into a few framing techniques that can maximize appeal.

Framing discounts as gains

Instead of saying, “$80 instead of $100,” consider saying, “Save $20 today!” This subtle shift frames the discount as a gain, emphasizing the positive side of the offer. 

Framing matters: by highlighting what the customer is gaining rather than what they’re spending less on, you make the offer feel more valuable.

Free shipping offers

Offering free shipping, especially with a minimum purchase threshold, frames the added value as a gain. 

Instead of hiding shipping costs in the product price, offer it as a reward for spending more, making it feel like an extra benefit rather than just another cost.

4. Diminishing sensitivity and tiered discounts

As customers spend more, they become less sensitive to incremental discounts. This is where tiered offers and loyalty rewards can make a big impact, encouraging higher spending without making customers feel pressured.

Here’s how to use diminishing sensitivity to your advantage.

Offering tiered rewards or discounts

Implement tiered discounts like “Spend $50 for 10% off, $100 for 20% off.” Customers feel an incentive to reach the next spending level, even if the incremental savings aren’t massive. 

Diminishing sensitivity makes these higher spending tiers more appealing because the initial jump in discount offers a strong pull.

Loyalty programs with tiered levels

Designing a loyalty program with multiple tiers creates excitement as customers advance to higher levels. Each tier unlocks new rewards, giving customers a sense of achievement (and gain) as they progress, encouraging them to spend more to reach the next milestone.

Sephora Beauty Insider tiered-loyalty programs

Wrapping up

Applying prospect theory in the ecommerce industry is about creating experiences that feel right to the customer on a gut level.

Prospect theory is also applied in the analysis of political decision-making, where it helps explain how psychological factors influence political leaders’ choices.

Whether it’s through loss aversion, strategic reference points, framing discounts as gains, or using tiered incentives, you’re tuning into how customers naturally think and feel.

So, next time you craft a promotion or optimize your checkout process, keep prospect theory in mind. You’ll be tapping into a deeper level of decision-making, helping your customers say “yes” with confidence—and boosting your bottom line along the way.