When faced with a risky choice that can avert disaster, a decision-maker is more likely to take greater risks if the decision can prevent a looming disaster (certainty cognitive bias). Conversely, when faced with a decision with risky options that can lead to great rewards, a decision-maker is more likely to avoid risk.
The biggest takeaway from this brief overview of Prospect theory is that responses to potential loss are much greater than to potential gain.
These two pillars of Prospect theory can be utilized for great effect in your ecommerce business, by either highlighting the perceived risk and eliciting the twin emotional motivators of fear and anxiety, or by mitigating the potential loss.
In both cases, fear of loss is at play.
The first pillar is the fear of losing what you already have if no action is taken, after all, we all want to keep what we have, even if it’s not much, so you are going to try to prevent loss right?
While in the second scenario or pillar, is the fear of risking taking action when by doing nothing, nothing is lost. This might also be described as loss aversion.
At what point is the reward great enough to overcome the fear of potential loss?
The prospect theory is, therefore, a case of risk vs reward. At some point, the potential reward overcomes the potential loss. Ultimately, the potential reward must be far greater for the decision-maker to risk what they already have. This is why people prefer to risk just a little and for poor returns.
What is Prospect Theory in Ecommerce?
Some of the best examples of the use of prospect theory come from the ecommerce world, for example, the use of the concept of free shipping to reduce the financial risk (cost) of purchase or the use of a great returns policy or money-back guarantees, mitigating the risk of the delivery of flawed products.
Therefore, one might define the use of prospect theory in ecommerce to remove barriers to purchase, reducing the perceived risk of purchase.
Other words that might be used to describe it include, to reassure, increasing confidence, and eliciting a sense of certainty. In this case, you are changing the emotional response, dialing down the fear of risk, and adding a dash of trust.
How to use Prospect theory in Ecommerce?
There are many products or services that can be sold based on averting a truly terrible outcome, extremes that spring to mind are:-
- Life / Accident – Insurance sales of all kinds.
- Bomb shelter
- Spare tire sales/auto rescue
- A seat on Elton Musk’s Mars spaceship
- Fire extinguishers
- All security-based products (house alarms etc)
- Clothing (warm coats when sub-zero outside).
- Sunscreen lotion.
To name just a few……….
You might consider any one of these items as insurance since they all provide peace of mind. However, something as small as a bad hair day might be considered a disaster to some. It’s all relative to the individual, – what we are all willing to risk and for what, this is a very personal question.
Tip: Whatever your product or service is, you might try to measure how important it is in their life using a scale of 1-5. You could then segment individuals into different groups according to their risk profile for the product in question and retarget them with appropriate content of varying extremes.
The Prospect theory can also be leveraged on ecommerce websites through gamification such as the Wheel of Fortune, invented by Wheelio and improved upon by OptiMonk.
A small perceived risk (providing personal information) in exchange for a decent return (a % discount on a product) is a convincing prospect that has been shown to greatly improve conversion rates.
What is the Possibility Effect (Cognitive bias)?
Prospect Theory goes a long way to explaining the cognitive bias of ‘Possibility Effect’ whereby humans place an overemphasis on highly unlikely, low probability events. Organizations that leverage the “Possibility Effect” include:-
- Insurance companies (to prevent loss) companies,
- lotteries and casino’s leverage (risk a little for big potential return) this effect to great effect.
- Security Companies
Using the Possibility Effect in Ecommerce
Identifying worst-case scenarios, unlikely situations that can be solved or prevented with your product is an important step for your ecommerce business. These can either be portrayed in a fun or in a serious way. Because such situations are unlikely to occur and unlikely to have been experienced, they can often be used in a fun or comic way, even though a few may have experienced such an event who consider it in poor taste.
A range of campaign variants could be used to determine their particular pain points (what motivates them). The chosen variant by the visitor could determine what kind of pain point they have and the level of risk they have in relation to the product or service.
It is important to AB test such content to determine what works best in the marketing of your product/s.
Words like surprising, shocking, funny would be a good way for your audience to respond with and describe your ad since your audience is engaging with your product and are likely to share your content.
Ultimately the acid test of success is whether your campaign leads to more purchases (and with the least number of complaints).
Limited Time Offers
The limited-time offer is another example of the use of Prospect theory.
By giving the website visitor a discount with a deadline, the fear of loss of what they perceive is already theirs (the discount you have given them temporarily), is likely to decrease the risk threshold, ergo they are more likely to make a less responsible, at the moment – impulse buy so they don’t lose the discount at the deadline.
Countdown timers on situationally triggered popups are a common way to deliver offers to the right segment of your customer base.
Most ecommerce websites use such techniques to increase the likelihood of impulse buying.
This is possible even with SaaS Ecommerce platforms such as Shopify through the use of Shopify apps, for example, OptiMonk, a conversion rate optimization platform.
The Point Where Potential Reward Overcomes the Fear of Loss
The best way to illustrate the Prospect theory is through the chart below.
The chart above clearly shows the theorized responsiveness to potential risk in loss or gain situations.
The sharp fall below zero on the axis implies a greater willingness to take risks to prevent a loss than above the X-axis, the slope is far more gradual above the X-axis implying a higher level of caution when taking risks for potential gain.
Personality and Risk
Risk is stressful, but more so for some than others.
Professional risk-takers such as fund managers routinely take big risks. They tend to pay little attention to the losses when they occur.
People who are less risk-averse are more likely to start their own business and make riskier investments. Therefore, such people are also more likely to ignore the risks when considering purchases too.
Age + Gender in Risk Taking
Another consideration is who the product is targeting, differing age groups (as we get older, we tend to become more risk-averse) and even gender targeting can have a big effect. Each difference tends to alter the risk profile of individuals.
For example, men tend to take more risks in general but especially in stressful situations vs women who become more risk-averse in stressful situations. The potential implications are that by highlighting the worst-case negative scenarios you might increase sales to men.
Gender-based targeting is controversial, with every piece of evidence indicating a difference between men and women being hotly contested, and whether this effect is due to nature or nurture is not the point, it’s about the outcome.
Again, it must be said here that there is no direct evidence of a physiological difference between men and women in how the brain works, – which is not contested in some way. Despite this, there is plenty of anecdotal evidence of sales outcomes remains.
Framing Your Unique Selling Proposition
In order to maximize your sales, you need to take Prospect Theory into account when designing your website, choosing your USP, and your subsequent campaigns targeting as many of your consumer groups as possible.
Consider loss and risk aversion in the most extreme scenarios and then dial it down from there creating campaign variations to AB test with a tool like OptiMonk.
Conversion rate optimization is the process in which all the above factors must be considered in the design and build of campaigns. It is part science and part art art.
Since nobody is the same there is no definitive right or wrong, just better or worse results based on what most people prefer.
Therefore, there is no certainty in designing campaigns but if you take psychological theories such as the prospect theory into account, and AB test your campaigns you will increase your conversion rate and make more sales.