Photo by Tiffany Washko
Imagine you just won the lottery and was rewarded $1 million. The tax department soon caught up with you and billed you 50% of your winning - which is a hefty $500,000. How would you feel?
Compare that feeling to this scenario: You just won the lottery and was rewarded $500,000… tax-free.
In which scenario do you think you would feel happier?
That’s right. You’d be happier in scenario B than in scenario A and that’s exactly what prospect theory predicts.
Why is that? Don’t you end up with the same amount of money? As it turns out, people tend to value losses more than they do, gains. So if you changed the rules on your customers and although the net effect might be neutral (or even slightly positive), satisfaction might go down.
Here’s an example. Let’s say you are operating an e-commerce style website and sells over a thousand products. When you increase prices on some of them and decrease them on some others, you’ve got yourself a prospect theory situation.
And imagine another scenario: What if the tax department billed you $100,000… five times instead of $500,000 for once? How would that affect your state of your mind?
You’d be even more pissed! That’s another aspect of prospect theory: That multiple losses hurts more than one loss of equal value.
So if you have a subscription based service such as a newsletter or a gym, make sure to charge your customers directly on their credit card. Because if you do that, your charge would just be one item in the long list of charges that he received for that month.
Can you think of other uses of prospect theory to boost your business? Leave your suggestions in the comments section!
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