Who This Article Is For
- Owners and marketers considering prices and how to present proposals
- Business professionals accounting for the other party's psychology in negotiation
- People applying behavioral economics in practice
Use Prospect Theory to Explain Gains and Losses in Pricing and Negotiation
Understand loss aversion, plan comparisons and trials, and communicate genuine costs of inaction without relying on fear or exaggerated claims.
Published
Explain Benefits and Avoidable Losses to Support Decisions
People react strongly to avoiding losses. In pricing and negotiation, explain what they can avoid losing alongside what they gain. Prospect theory helps clarify customers' and negotiating partners' judgments.
Prospect Theory Explains Loss Aversion
Prospect theory describes how people do not always decide rationally. Loss aversion is particularly important.
Losing ¥10,000 can feel more painful than gaining ¥10,000 feels pleasant. A message about avoiding a loss can therefore resonate more strongly than an equivalent gain.
This appears in shopping, contracts, investment, and negotiation. A decision that seems based on price can also reflect a strong desire to avoid losing out.
Why It Matters for Pricing and Negotiation
How the other person feels affects the result.
“Save ¥2,000 now” and “Miss this opportunity and lose ¥2,000 in benefits” describe the same amount differently. The loss framing can sometimes produce a stronger response.
In negotiation too, showing what the current situation may cost alongside potential benefits can help a decision move forward. Avoiding loss can be more motivating than maximizing gain.
Applying It to Pricing
Low prices alone do not determine the impression. Presentation matters.
Consider Loss Framing Alongside Discounts
An explanation of what disappears if someone does not apply now may produce a different response from announcing a reduced price.
| Message | Framing |
|---|---|
| Save ¥2,000 now | A gain |
| Miss this opportunity and lose ¥2,000 in benefits | Avoiding a loss |
This does not mean describing everything as a loss. Consider what the other person genuinely wants to retain.
A Free Trial Lets People Experience What They Would Miss
A trial provides an opportunity to try the service and imagine no longer having it afterward.
Giving up something useful can feel like a loss. Letting customers experience the value during the trial is therefore important.
Establish a Reference Point for Plans
The comparison changes how a price feels. Choose the reference point deliberately.
For example:
- Show the standard plan first
- Then show the higher-tier plan
- Finally show the lower-tier plan
This makes the middle option a natural reference. Customers can see the features and support they would give up alongside the price difference.
For more, see Reference Prices and How to Present Plans. It discusses establishing the basis for regular prices and avoiding misleading comparisons.
Explain the Cost of Waiting
People considering a price focus on the amount to pay. The cost of doing nothing can also matter.
For a website, missed inquiries under the current arrangement are a cost alongside development fees. In recruitment, delayed hiring can cost time and opportunities.
This perspective also applies to SpreadSite, which I developed to create websites from spreadsheets. Postponing a website can mean continuing to miss opportunities to communicate and receive inquiries. Try it if you want to begin sharing information with less time and expense! SpreadSite
Applying It to Negotiation
Benefits may be insufficient on their own. Seeing what the status quo could cost can help the discussion progress.
Describe What the Other Party Might Lose
Alongside your advantages, explain possible losses from continuing unchanged.
- Response costs may keep increasing
- Delayed adoption may lose opportunities
- Postponing a decision may let competitors move first
Concrete consequences make the decision easier to assess.
Offer Concessions in Stages
Giving everything at once may make it seem expected. Smaller stages let the other person recognize several gains.
The burden on you may be identical, while the impression differs. Consider how each concession will be received.
Show the Cost of the Status Quo
A reluctant party may see only the cost of changing. Explain the cost of remaining unchanged too.
The status quo can appear free while costing time, opportunities, revenue, or trust. Making those costs visible changes the discussion.
Avoid Fear as the Only Motive
Misuse creates distrust. Explaining a loss differs from creating anxiety.
Honestly describe consequences that could actually occur. Frightening someone into a short-term response does not build a lasting relationship.
SpreadSite is a no-code website builder that lets you create, publish, and update a website from Google Sheets using ready-made templates.
To show your service value and relevant comparison information clearly, give SpreadSite a try!
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About the Author
Thank you for reading!
I develop and operate SpreadSite, a service for creating websites from spreadsheets.
It helps people with limited time and money communicate what makes their work appealing. Consider it if you need a website! SpreadSite
Frequently Asked Questions
Q: Can different industries use prospect theory?
A: Yes, particularly where customers compare prices, maintain ongoing contracts, consider proposals, or negotiate.
Q: Is avoiding a loss more effective than a discount?
A: It depends on the situation, though loss framing can be more persuasive. Excessively forceful wording can backfire.
Q: Does discussing losses make negotiation pushy?
A: Presentation matters. Calmly showing a plausible disadvantage as a fact is different from threatening someone.
Q: What should I be careful about?
A: Use the idea to make important decision information visible, rather than making anxiety the sole objective.
