Endowment Effect: how it works and why you should apply it in your business
When you want more customers, sales and profits, it is smart to take advantage of the Endowment Effect. This effect makes your potential customers assign more value to your products and services. In this blog you will discover exactly what the effect is, how it works and why to apply it in your business. With concrete examples, so you know how you too can apply it in your business.
What is the Endowment Effect?
When you as a customer have (or think you have) a product or service, you attach a certain value to it. This is called the Endowment Effect, also known as the ownership effect or possession effect. Irrationally, you are going to value the product or service more than it is worth.
Psychologist Daniel Kahneman (Nobel laureate) and Amos Tversky described this effect in 1978. During a classic experiment, they examined how people placed value on products. Half of the participants were given a mug worth €1 and the other half a pen of the same value. During the experiment, the researchers asked who wanted to trade his/her mug for a pen and who wanted to trade his/her pen for a mug. Virtually no one wanted to make the exchange.
The Endowment Effect shows that the recipients of the mug attributed more value to the mug when they received it and therefore did not want to exchange it for the pen which in their eyes now had a lower value than the mug. This effect also applied to the recipients of the pen. Of these, the value had also increased in their eyes, so they did not want to exchange it for a €1 mug.
Endowment Effect - how people value what they (psychologically perceived to) possess more than what they do not (yet) possess.
The Endowment Effect is a certain way of thinking
As you can see in the research, people often think irrationally rather than rationally. Daniel Kahneman describes this in his book 'Our fallible thinking'. He argues that we have two thinking systems: a fast, intuitive way of thinking and a slow, conscious way. While researching the pen and mug, Daniel Kahneman and Amos Tversky found out that people rate products and services more valuable when they own them because they think with the intuitive thinking system. Super interesting book from which you can get a lot for your customers' appreciation of your business.
Apply Endowment Effect in your business
Now that you know that people place a higher value on something they (think they) own, it's smart to harness this effect to more sales create. There are several ways you can capitalize on this effect. I'll give you some examples so you can see for yourself how you implement this in your own business.
The virtual shopping cart
Many Web shops apply the effect by using a virtual shopping cart. As a customer, you place a product or service in the shopping cart. He or she does not yet own the product or service, but because the product or service is already in the shopping cart, this reinforces the feeling of ownership. As a result, the customer gives the product or service a higher value in his or her mind and no longer wants to part with it. So apply this when you sell products or services through your Web site. Have your web builder implement a shopping cart so that your customers can put their products or services in here.
Adapt your language
If you also want more downloads from your free giveaway, it's smart to capitalize on the Endowment Effect through the way you communicate.
Prefer not to write:
❌ Download my e-book here
✅ Grab your e-book here
Also adjust the other CTA buttons on your website to create the effect. Don't forget to adjust the rest of your language on your website and in your posts. Use you and yours rather than I, my, we, us and our. With your and yours, it already feels more like ownership. Are you creating a product description? Then describe it in such a way that the reader feels like he or she owns the product.
You can see an example of customizing your language on the Bol.com website. When you look on a product page for a book, you see it says: Choose your binding and choose your edition. So they are already acting as if the book is yours.
Free strategy call with tips
Speaking of giveaways... Not only am I offering an e-book, but also a free strategy conversation of 30 minutes. During this conversation, I share valuable tips and outline what specific opportunities and possibilities I see for your ambitious goals. As a result, you already experience what it's like to work with me and how much value I offer you. So giveaways are ways to provide the Endowment Effect.
Trial period of your product or service
A trial period is also a very good way to increase the Endowment Effect. When customers are allowed to try a product for free, psychologically they already feel ownership of the product or service. Thanks to the trial period, the value of the product or service increases in the customer's mind, making the purchase price feel lower. There are a number of examples of this:
- During a test drive, a car is assessed as more valuable. You experience the positives that did not play a role in the decision process before. Thanks to the test drive, you also already consider the car as property, so you attach more value to it.
- Videoland allows you 14 days of trial viewing. The more often you watch a movie on Videoland, the more the platform gains insight into your preferences and adjusts its offerings accordingly. This improves your experience and chances are you won't want to cancel Videoland at all after the trial period.
From freemium to paid options
Another way to achieve the Endowment Effect is With a freemium package. You offer the basic features of your program or tool, but for more features, your customer must purchase a subscription for a fee. Often, the longer you use a program or tool, the more you want the extra features and thus end up purchasing the paid version. Spotify does this, for example, but so does Google Drive with their storage capabilities. By offering a small portion of your services, your customers are going to want the extra features overvalue.
A fremium service with paid extras is also something you can set up in addition to your current offering, in order to get more revenue streams create.
More opportunities to create the Endowment Effect.
There are other ways to create the Endowment Effect:
- Create scarcity or make time-bound offers
- Show customer reviews and/or recommendations
- Offer a money-back guarantee
- Bundle products to increase value
Schedule a strategy call now for growth opportunities for your business
I personally employ innovative and value-driven strategies for myself and for you as a client to create the Endowment Effect. Together with you I will work to:
- Enrich your offering to make it more valuable and of incomparable value
- Offer new, innovative products and services that meet the needs of your top customers. And where your value is maximized.
- Optimizing your marketing machine so you attract your top customers. Allowing you to accelerate and grow your business.
Are you an ambitious entrepreneur with ambitious goals, such as growing your business? Do you want to do this by working not harder, but strategically smarter, so that you achieve more gains in time, revenue and impact?
Then schedule your free strategy conversation in which you discover the new opportunities and possibilities, do I envision for you.