Loss Aversions and Coin Flips: How to Beat Your Buyer’s Incumbent

Have you ever wondered why so many buyers will settle on staying with their incumbent, even when what you are offering is better then what they are currently receiving?

Well, there is actually a science to this type of decision making called Prospect Theory, and it can be compared to a simple game of a coin flip.

Most of us are familiar with the coin game Heads or Tails.  Let’s say I place this wager with you:

If it lands on Heads, you owe me $10. 

If it land on Tails, I owe you $10.

Would you take this wager?

Heads or Tails?

I bet you wouldn’t because once the coin is flipped, we each have a 50/50 chance of winning – putting the odds at 1:1.

So how much would you be willing to gain before you would be willing to lose on a $10 coin flip?  Would it be $12, $15, $20, $50, $100?

Quite frankly, people would rather win than lose. In fact, according to Daniel Kahneman’s Prospect Theory, on average the ratio that people like winning compared to losing is between 2 and 3.  Using this theory, most people would risk $10 in the hopes of winning $20, giving them 2:1 odds to make the bet worthwhile.

How does this apply to sales opportunities when the incumbent is favored to win?

If you apply the Prospect Theory, then every time you are stacked up against an incumbent, you will have to offer 2 times the amount of benefit (or Derived Utility) to your buyer than the incumbent because the buyer—due to Loss Aversion—values the relationship and what they may be losing out on if they went with a new vendor.

In sales engagements, you need to know how you will prove your offer is worth 2 times the benefit more than the buyer’s incumbent. Having a conversation with your buyer will lead to better understanding of their needs and requirements. In addition, you should have a grasp of what strains they will experience if something goes wrong with the transition from an incumbent to a new vendor.

Everyone is affected by Loss Aversion

The only way to overcome loss aversion is to gather insights into what the buyer sees as the most valuable benefits a solution can provide, as well as the level of effort they are willing to make to achieve those benefits.

This is where implementing a Voice of the Buyer program can be beneficial.  Asking your buyers what drives their decisions and what criteria has the most impact on those decisions will give you a  bird’s eye view of your buyer’s evaluation process. I mean who knows your buyers better than the buyers themselves?

Mike Brose Quote

What You Can Do

It does not matter who they are, what they do, or where they come from. Your clients will always be MORE concerned about what they might LOSE than what they might GAIN!

The key for us as salespeople is to research what buyers see as potential losses and benefits in selecting our solution.  Then leverage that knowledge to offer them a wager that they will be willing to take.

Further Reading

Prospect Theory: An Analysis of Decision under Risk

Risk Aversion and Expected-Utility Theory: A Calibration Theorem

The Big Idea: Before You Make That Big Decision

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