I am with my closet friends jamming out to the new Justin Bieber hit on Spotify when all of a sudden an ad for Plato’s Closet starts to play.  UG.  Not again!  What a buzzkill.

For those who don’t know what Spotify is, Spotify is a music, podcast, and video streaming service.  It is offered in two different versions: Free and Premium.  On the free version, you can listen to music for free and you have the feature of shuffle play.  On the premium version, you can listen to music for free and you also have the features of shuffle play, ad free, unlimited skips, listen offline, play any track, and high quality audio.  Premium just sounds awesome and the obvious choice to have, right?  It does, but the catch is Spotify premium costs $9.99 a month.  Although that isn’t necessarily the biggest chunk of change, it sure isn’t any price that I want to pay to just simply listen to music.  So how does Spotify entice people, like myself, to go premium?

Well, Spotify entices people to go premium by using the concept of loss aversion.   Loss aversion is a concept based on the fact that people don’t like to lose what they’ve already gained.  Spotify offers a free 30 day trial of their premium version that allows users to experience all of the benefits of being premium.

Go Premium.  Be happy.  Try premium free for 30 days.  Only $9.99/month afterwards.”

After this period of 30 days is up, you can opt to keep the premium Spotify version (and now pay the monthly fee ) or degrade back to the free Spotify version.  Because of loss aversion, many customers opt to stay premium—even I am guilty of now being a premium Spotify member.  As one can see, loss aversion plays a significant role in freemium products and increased product adoption.

Daniel Kahenman’s mug experiment gives another example of how strong of an impact loss aversion can have.  In his experiment, he gave participants mugs, chocolate, or nothing and asked them to make a choice: if they were given an object, they could trade it, or if they were given nothing they could choose an object.  It turns out that 86% of those given mugs to begin with stuck with that item and roughly half the participants who started with items chose mugs.   This, again, demonstrates that people really don’t like to lose something they already have.

So, in the future, be sure to take note of the effect of loss aversion.  Don’t let free trials trick you into purchasing something you actually don’t want! 🙂

 

Sources: http://www.nytimes.com/2013/12/09/your-money/overcoming-an-aversion-to-loss.html?_r=0

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