I’m in the middle of reading a book I really like — Strategic Risk Taking: A Framework for Risk Management by Aswath Damodaran.
Damodaran talks about how people perceive risk and the paradoxical way they act on risk as a result of those perceptions. What I mean is: People should be consistent in how they act when faced with similar risks but they aren’t. They perceive risks different for a number of different reasons that has very little to do with the ultimate result. Risk aversion or risk acceptance has a lot to do with perception! I touched on that idea a bit in a previous blog post called The paradox of risk: Why most people want certainty but gamble anyway, and I listed a few of these paradoxes in my experience as a financial and real estate writer and former stockbroker.
For businesses who are trying to sell stuff, this can actually make it more difficult. When we sell, we ask our customers to risk something (their money, their time, and perhaps even their reputation) to buy from you and when the reward of your product is greater than the risk of buying it, all customers should theoretically buy. That’s the logical sequence of a consistent approach to risk.
However, because there are factors that impact our perceptions of risk, people do not react logically and consistently to risk and therefore your customers may choose to buy the exact same product for the exact same price from your competitor. It all comes down to how we perceive risk.
In chapter 2 of his book, Damodaran lists some of the ways that risk perceptions change (even when the underlying risk itself doesn’t change). I’ve taken his list (from page 26 of his book) and extrapolated some of them to show you how your marketing and sales efforts can be tweaked slightly to help you sell more.
- Framing: Damodaran talks about how people are more likely to buy a product that normally lists for $2.50 and they can get it for 20% off than to buy a product that sells for the list price of $2.00. Even though they pay the same price, the higher-priced product that has a discount appears to have higher value. (Interestingly, and Damodaran doesn’t touch on this, but I think this will only work within a certain range. A high priced product with too big of a discount will suddenly appear to be underpriced and therefore desperately under-valued). On a related topic, I’ve observed that people respond far more positively to a “pay no tax” sale compared to an across-the-board discount of 15% or more. Even though they say only 5% to 12% (depending on the sale tax where they are shopping), the idea that they might be screwing the government out of money is an attractive frame to people.
- Non-linear preference: Damodaran says that individuals who prefer product A to product B, and product B to product C should, theoretically, prefer product A to product C… but this is not always the case. What that means for businesses is: You need to filter your customers into target markets but it’s okay to offer products from time to time that you don’t think they would be interested in.
- Source: Damodaran calls this “the mechanism through which information is delivered may matter, even if the product or service is identical”. He goes on with an example about two identical products that are packaged differently. People may buy the product with one type of packaging and not the other, even though they plan to discard the packaging. This is an exciting opportunity for businesses because it affirms that your marketing and sales (which are a type of packaging) really matters. A lot. This is a reason why you want to be an expert (check out my related blog post about how real estate agents can differentiate themselves from their competition).
- Loss aversion: This is huge. People are more motivated by loss than by gain. I blogged about this in my post why your prospects aren’t buying from you. Therefore, your marketing and sales efforts need to spend a lot of time addressing the problem of perceived loss and how your customers can gain (and never lose!) when they buy from you.
I’ve only highlighted some of Damodaran’s list and he doesn’t suggest that his list is comprehensive. But if you’re wondering how to get more people buying from you, this is a great start.