Written by Georgi Zai
In our previous articles we uncovered the importance of Reference Point (How people perceive value in Financial Services) and Loss Aversion (How loss aversion can help craft a strong value proposition), and how these can serve as instruments for identifying customers’ baseline and intensity of emotional response when assessing value. In this article, we explore how Diminishing Sensitivity affects the perception of gains and losses, and how businesses can take this into account to maximise the impact of their strategy.
The intensity of the feelings
People react to losses and gains with different intensity. With that, our emotional response is not unlimited. At some point, the intensity of the feelings will lessen.
For example, a person finds $10 on the street. The joy from this unexpected gain is significant. However, if the same individual finds another $10, the additional happiness experienced is generally less than that from the first $10. Essentially, the initial $10 feels like a substantial win, but each subsequent $10 has a diminishing emotional impact.
Diminishing Sensitivity proposes that as gains or losses enlarge, their perceived emotional impact wanes.
For a robust value proposition, this notion can be distilled into two straightforward principles:
- delivering substantial enhancements, and
- acknowledging their progressive limitations.
Substantial upgrades over minor enhancements
In today’s fast-paced world, people are evaluating thousands of choice options on a daily basis. Evolution has trained us to zoom in on those choices that promise the highest overall value, while dismissing those yielding only marginal gains.
Offerings that provide minor upgrades, fade into the background unnoticed or deemed unimportant, while those promising substantial gains, get at the forefront of our attention.
Take the case of Apple’s Savings Account, launched in April 2023. While its 4.15% APY on deposits is competitive, it doesn’t top the market. Yet, Apple’s offering has managed to overshadow many alternative offering with higher APY rates.
What sets Apple apart is the whole package: the strong brand, ease of use, absence of fees, etc. These combined benefits elevate the offering’s overall value, enabling Apple to attract over $10 billion in deposits in four months.
This leads us to a somewhat obvious, yet critical, takeaway: for an offering to stand out, businesses should strive for a noticeable (and meaningful) improvement of the total value.
An even greater advantage can be gained if the improvements exceed what customers generally expect in terms of value in various aspects of their lives. Such an offering won’t just be another option, it’ll automatically grab top-of-mind awareness.
Small wins, big gains
Interestingly, the principle of Diminishing Sensitivity also instructs that delivering value in smaller chunks, or increments, can be more effective than presenting it as a single, large gain.
This time, consider two people: one finds a single $50 bill, while the other finds five $10 bills over the course of the day. While the emotional impact of each $10 bill decreases with each found bill, the overall happiness experienced by the second person is greater than that of the first person.
This principle applies beyond monetary gains. For instance, American Express smartly ‘slices’ its rewards into multiple categories like dining, shopping, and travel. By doing so, they create multiple individual moments for customers to celebrate gains for each category, effectively increasing the perceived value of the overall offering.
When upgrades become invisible
The phenomenon of Diminishing Sensitivity often manifests itself as Hedonic Adaptation. While the initial enthusiasm over a new feature or service is high, this excitement gradually wanes as customers acclimate. This puts companies in a complex bind, forcing them into a cycle of constant feature updates to meet ever- rising customer expectations.
However, this treadmill of perpetual updates isn’t sustainable. Even if technically feasible, the principle of Diminishing Sensitivity dictates that each subsequent upgrade will be perceived as less valuable than the last.
This leads to the second critical takeaway: the perceived value of improvements to an offering’s attribute decreases progressively with each iteration.
Consequently, businesses will hit either a performance plateau or a perception plateau, where further enhancements either become unattainable or fail to make an impact.
The perceptual layers of value
To avoid reaching a point where customers no longer perceive any value in the improvements, companies should diversify their offering’s value across three key dimensions:
- Psychological, and
Focusing on only one of these dimensions runs the risk of hitting the already mentioned value ceiling, as well as making the offering vulnerable to more balanced alternatives.
Klarna serves as a prime example of a well-rounded approach. Competing effectively in the monetary domain, Klarna constantly enriches its functional benefits by adding new features rather than just refining existing ones.
But most importantly, it excels in building up psychological value, completely eclipsing the rivals. Klarna’s positioning today is balanced between the emotionally nuanced “Smooth Shopping” and the inclusive “Cloths love all” which taps into deeper needs for self-identity and self-expression.
The temporal discounting principle
Lastly, let’s look at Temporal Discounting, another related facet of the Diminishing Sensitivity. This principle suggests that people often opt for smaller, immediate rewards over larger, delayed ones.
One firm that ingeniously leveraged this bias in the mutual interest is EarnIn. This U.S.-based service allows workers to access a portion of their earnings daily, rather than waiting for traditional bi-weekly or monthly paychecks.
Backed by the principle of Temporal Discounting, the service fulfills immediate financial needs as well as satisfies the psychological craving for instant gratification. In addition, as an employer-provided service, EarnIn elevates the perceived value of businesses that offer it, making them more attractive to employees.
Enriching your value proposition
The last article of our series underscores that understanding Diminishing Sensitivity, and its biases, Hedonic Adaptation and Temporal Discounting, can enrich your value proposition. By recognizing these concepts, you not only avert the pitfalls of incremental feature upgrades, but also unlock a universe of diversified value offerings.
We hope that by understanding and leveraging Reference Point Dependence, Loss Aversion, and Diminishing Sensitivity, three principles in Behavioral Economics businesses will be able to refine their value proposition in profoundly impactful ways, revealing not just incremental improvements but pathways to innovation.
This multi-faceted approach can elevate your business strategy, giving you a formidable edge in a crowded marketplace.
This article is the third of a three-part series grounded in Behavioral Economics, and more specifically, the Prospect Theory, where we explore how key behavioral biases are tied to value perception. Using fintech exemples, we showcase how understanding these biases can bolster value propositions, granting a marked competitive advantage.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of the Swiss Finance + Technology Association.
Georgi Zai is a senior marketer with 20 years of experience in the financial and IT sectors, and an aspiring product manager. He has had impactful roles at Saxo Bank, UBS, and Falcon Bank, where he’s contributed to launching innovative financial products and applications.
Skilled both in strategy and execution, Georgi also brings a background in UX design, paired with a passion for behavioral science. He shares his expertise as a mentor to startups.
Outside the office, he’s an avid athlete and has completed 16 Ironmans, including the esteemed Ironman Hawaii.