Prospect theory studying behavioural economists have named the term ‘loss aversion’ to define the rather common human tendency that people highly prefer to avoid losses rather than acquire gains. It has been shown that ‘people find losing two times more painful than not winning’ in recent studies.
The previous sentence may keep you thinking, because, “losing” and “not winning” seem to be the same thing – if I don’t win; then I lose; and doesn’t everyone want to win? Turns out that most of us don’t like losing.
Loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. A classic example of loss aversion is when people hold onto a falling stock because they don’t want to lose money if they sell. Although, practically, it would be better to sell the falling stock and re-invest the money into a rising stock. Yet, stock brokers have many stories on the end of people who held on to bad investments.
Loss aversion can become adversely debilitating making people to use a lot of effort to achieve nothing. It also leads people to avoid taking any risks, even, well calculated risks. However, when planned suitably, one can use humanity’s preference to avoid losing to your benefit.
Think through this test:
Most of the sales incentives aim to reward someone for meeting a goal. Below is an illustration:
Incentive Program A:
• Sell Rs.1,00,000 of product each week and win 1,000 points (to be used towards items in the companyrewards catalogue).
• Sell less than Rs1,00,000 in a week and get no points.
• In a 12-week program, a salesperson who hits their goal each week could WIN 12,000 points.
The above guidelines work well because you pay for winning performance. Everyone likes to win.
Incentive Program B:
Now let’s swap it around to take advantage of loss aversion which emphasises on making losing twice as painful as not winning.
• Start the program by giving every sales person 12,000 points (the points don’t become redeemable until the program is over).
• Every week that a sales person doesn’t sell Rs.1,00,000, he or she LOSES 1,000 points.
Nobody wishes to lose and might put in more efforts to maintain high points.
The opportunity in both the cases is exactly the same: up to 12,000 points. If the sales force is loss averse, you should get better results in the second program because people will work harder to keep their points.
Try it both ways.
Another option would be to provide your sales reps with a choice: start with no points and WIN for meeting the scores OR, start with the maximum number of points and LOSE for not meeting the goal. The point to be noted here would be to see how many of your sales reps choose each option.
Give it a go!
Let’s say you decide not to actually structure your incentive program using the loss aversion format, even then, this might make an catchy topic of discussion at your next sales team meeting. You can even share this information and receive opinions from your team.
Contact us for more information on how to make your sales incentive program work better.