Is loss aversion causing you to overspend on packaging?

June 30, 2020

This article is part of our series of strategies to reduce packaging costs throughout your supply chain. Want the full set? Download our free guide with all 30 strategies.

Loss aversion is a cognitive bias that leads people to focus on avoiding losses rather than making equivalent gains, meaning most people prefer to not lose a dollar than find a dollar.

For packaging, this bias can be costly. Companies frequently overpackage fragile or perishable products to avoid rare shipping mishaps. In other words, overpackaging every shipment costs more than replacing a few of them.

To avoid overpackaging your shipments, consider balancing your defective shipments with your replacement costs.

Here’s a hypothetical. Imagine your company ships 10,000 fragile ceramic mugs. Depending on how you package those mugs, you can achieve different breakage rates at different costs. Wrapping your mugs in butcher paper may result in 1% breakage, a folded corrugated insert may result in 0.1% breakage, and a custom molded insert may result in 1% breakage. How many mugs are you willing to break?

Packaging costs for 10,000 shipments of fragile mugs
Broken mugs 0 10 100
Breakage rate 0% 0.10% 1.00%
Packaging unit cost $2.00 $1.00 $0.25
Packaging costs $20,000 10,000 $2,500
Replacement unit costs $32.00 $31.00 $30.25
Replacement costs $0 $310 $3,025
Total costs $20,000 $10,310 $5,525
Savings % 0% 48% 72%

Think about how this may apply to your business by replicating this table to find your own sweet spot. By visualizing the tradeoffs, you can find out where the diminishing returns exist before underpackaging your shipments becomes a danger. The manufactures you connect with on Lumi can help you run breakage and transit tests to understand the minimum viable specs.

This is a simplified model with many assumptions. It doesn’t take into account your customer service costs and the impact to your brand's perce. Yet, it shows that if you are willing to sacrifice 10 mugs across 10,000 shipments, you could be netting nearly 50% savings on packaging, even when accounting for replacement costs. 

This kind of comparison is simple, but critical — and it's not just for breakage. Products that are temperature-sensitive or moisture-sensitive should also be assessed. For example, if you ship chocolate bars you may need to protect them from melting on summer days in hotter regions of the country, however you should consider having a less costly, alternative packout for customers in colder regions or cooler times of year.

Your inclination towards loss aversion can cause you to spend more money on packaging than you would be losing on returns. By making this change, you can not only reduce costs, but also reduce materials and components, making your packaging more sustainable.

Download the full guide

Reduce Your Packaging Costs: 30 Strategies

Innovative brands use Lumi to manage scalable and sustainable packaging.

Learn more →