Loss Aversion: Mitigating Churn Users through Loss-Induced Strategies
Imagine if you were born as Elon Musk, who owns Twitter Inc. (or today is starting to be X). All of a sudden, 5% of your users stopped using your platform and moved to Threads, similar platform from your lovely enemy. You are not doing anything until two months later, another similar platform shows up: SocialVerse (SV). *This is just my imaginary platform.
At first, you only lose 5% of your users, but two months later, you lose 10%. In the months after that, you lose 20%, 30%, and 40%, respectively, of your initial users. Your users move to Threads and SV. Eventually, it turns out that three years later, you only have 30% of your users left. If that happens, do you still want to be born as Elon Musk? Or you want to be born as an SV and Threads owner? I personally didn’t want to be anyone else; I just preferred to be born as a strawberry from the beginning instead 🍓
This is a story of fiction. Any similarities to persons or actual events is purely coincidental
Loss Aversion
So the question is, how can we prevent that kind of phenomenon from happening? In the fiercely competitive landscape of modern businesses, user retention has become a critical aspect of sustainable growth. One psychological principle that businesses can leverage to combat churn and retain users is “Loss Aversion.”
Loss aversion is a cognitive bias where people tend to prefer avoiding losses over acquiring equivalent gains. Kahneman and Tversky (1992) have suggested that losses can be twice as powerful, psychologically, as gains. Or in other word, the response to losses is stronger than the response to corresponding gains. For example, losing $100 can feel much worse than the happiness of gaining $100.
For businesses, utilising loss-induced strategies might be an alternative way to retain users by appealing to their aversion to losing something of value.
Practical Applications
So, how do you retain users using the loss aversion concept? Definitely, different business models require different approaches. The key is to make users feel like they might miss out on something valuable if they reduce their activity or consider leaving your platform.
Here’s some of the ways in which industry has been implemented:
- Special Offer for Vulnerable Users in Subscription Model Businesses
Offer a one-time discount for the next billing cycle for subscribers who are considering cancelling their subscription. Frames the user so that they might miss out on a special benefit if they consider leaving us right now. - Milestone Rewards Mechanism in the Advertising Model
Implement a milestone mechanism that rewards users for their consistent engagement and activity on the platform. Any inactivity will reset their milestone to a certain stage. This is similar with what MLBB (Mobile Legends: Bang-Bang) do. It might tell users that they will lose their milestone if they leave us. - Digital Time Capsule/Personalised Wrap Activity Report
An annual report of the user’s activity or achievement could be useful. Just like what Spotify does with Spotify Wrapped, giving users what they have been listening to for a year. Or what users purchase in a certain period of time on an e-commerce platform. This will trigger users to keep using our platform so they’re not missing out on getting a very beautiful report (and showing it off on their social media 😉)
Finding the Optimal “Loss” to be Offered
Determining the optimal “loss” to be offered to users requires a delicate balance. Offering too little may not create enough motivation for users to stay, while offering too much could lead to reduced revenue or exploitation of the system. For a simple example, how long is the optimum frequency period we should give the Wrap Activity Report? Is one year enough? Or is it too long, so users might be too lazy to stay for that long to get the report?
To find the optimal loss, conducting an A/B test might be the best practise. But what about the “optimal loss” we should test that is still beneficial for business but can also still retain users? Just hire an analyst to calculate that.
Recap
Loss aversion is a psychological tendency where people are more afraid of losing something than gaining something of equal value. Businesses can use this aversion to retain users by offering loss-induced strategies. The key is to make users think they could miss out on something valuable if they use the platform less or even leave. However, finding the right balance is crucial. Offering too little won’t motivate users, while offering too much might lead to reduced revenue or system exploitation.
