Heuristics: Scarcity And Loss Aversion As Motivators

As we have evolved over time – humans have developed a number of decision making shortcuts or Heuristic. We use these to speed up the decision making process.

Heuristics usually govern automatic, intuitive judgments. But we can also deliberately use them when working from limited information.

By understanding the role of heuristics in human psychology, we can influence decisions as marketers or in sales. Decisions such as: the prices people pay for goods, the quantity, or the frequency with which they buy.

The first I’d like to explore more today is scarcity – or perceived scarcity.  

The scarcity heuristic relates to the belief that as things become less available they become more desirable. 

A simple example of this is our actions at social gatherings. Where two plates of similar sandwiches are laid out, one with 75% left and one with 30%, we associate the scarcity with popularity. Our brain goes “Wow, most of those sandwiches are gone, they must be popular or tasty, I’ll grab one of those as there are plenty of the other ones left.”

I can tell you firsthand from my early adulthood experience in retail,  scarcity works. Displaying one or two of each size in a t-shirt outsells putting out five or six of each size.  

Knowing you can have one of one limited digital assets is the core selling point of NFTs and the digital files they reference. Their ludicrous prices are testament to the power of scarcity.

Controlled availability can drive perceived scarcity but also bring out the anti authoritarianism in us.

If something is forbidden we know that not everyone is doing it – it’s scarce – so it’s also more attractive. We want what we can’t have and value it, even if we’re not sure what it is. Why is it banned? Why is it taboo?

Red Bull accredits rapid growth in the EU to certain countries banning it. As the product was smuggled across borders into french nightclubs, sales took flight (sorry, I had to).

In court, if a jury has been told to disregard a comment – research has shown that they subconsciously put greater weight on the comment. 

So how do we drive sales or illicit actions with scarcity?

Well, we can hint it might be your last chance to get it. We can combine this with social proof by showing how many have already been purchased and how many are left. 

Position your products as scarce or running out. 

Think how infomercials show products that are selling out. Adding a mock counter would be deviant, but mentioning limited stocks or even showing the colours that have already sold out could drive someone to purchase faster on your site or app.

 Some more subliminal examples of this are:

  • Coke limited editions
  • online only exclusives 
  • by invitation only membership club deals – (48 hours only)

You could also pair a higher price with these limited editions to make them seem even more elite and desirable.  

Loss aversion – that FOMO – fear of missing out factor.

Let me offer you two scenarios to explain what a great motivator this can be:

  1. If you clap three times I’ll buy you three new phones tomorrow
  2. If you don’t clap three times I’ll take your phone now.

The second is more compelling right? Once you have something, you don’t want to lose it. Here are a few examples.

Utility companies
Bills offering an an early payment discount for automatic payments are a good example of this.

Accomodation
Hotels use these tactics at both extremes of their pricing. The early booking discount, then the late checkout penalty. The last available room’s high rack rate and then the last minute discount rate are all used to maximise occupancy and play on scarcity.

Bundled utility packages
In this model, a combined discount makes it hard to relinquish in order to unbundle and set up your whole internet, phone and TV package with other providers, that might be cheaper.

e-Commerce
Pre-loading shopping carts. This can help with upselling additional products. Let’s say you click to purchase a new iPhone and the system pre-loads the cart with:

  • insurance for the product at a discounted rate (showing a stand alone price $100)
  • discount for 24 month mobile plan  (showing the without plan price of $1000)
  • a free phone upgrade every year for $10 per month. 

Users will be reluctant to remove these items from the cart as they have already in some way “got” them. 

They feel they will miss out on discounts and extras by removing them. 

SaaS
The free trial model is another way to get people used to having your service. Of course the balance is in knowing how long to keep it free. The freemium pricing model often leverages limited time access to the full product – in order to drive adoption and show users how great it is. It then reverts to a configuration where the right features or volume of usage, requires the user to subscribe and pay.

Other examples  

  • Coupons with tight expiry dates – you have the coupon and will lose it fast. 
  • The line Readers’ Digest uses in countless direct mail messages “you may have already won X”.  
  • “If you don’t insulate your home you will lose $50 a month”
  • “Price ends tomorrow” – which combines well with scarcity.

The queues at petrol stations prove if you warn of an imminent price increase it will drive sales as people don’t want to miss out. 

It astounds me how many people are willing to queue for hours, to save an amount well under their hourly wage.  

One final point to note with loss aversion – make it timely. The loss of your life to smoking is too far out for the average smoker to see or worry about. But the loss of your partner due to bad teeth, breath and skin is shorter term and easier to quantify.  

So get to it. Use these two heuristics now, before everyone else does 😉.


Want to lear more about heuristics check out:

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