The Endowment Effect: 3 Actionable Ways to Boost Your Sales

Have you ever tried to get rid of some belongings you haven’t used in ages (and have no actual use for in the foreseeable future)? If so, how did it go? I’m guessing not well.

It happened to me a bunch of times as well. Recently, I was going through some old books and magazines I used to read as a teenager. Deep down, I knew it’s highly unlikely I’ll ever read that stuff again, but still, I held on to them. As I was on the verge of getting rid of those, a voice in my head started telling me “maybe someday you’ll need those”.

That “voice in my head” actually has a name – in behavioral psychology, it’s referred to as the “endowment effect”.

What is the Endowment Effect?

In his paper titled “Toward a Positive Theory of Consumer Choice”, Richard E. Thaler asserts that “in certain well-defined situations, many consumers act in ways that are inconsistent with economic theory.”

(Thaler is the Nobel Prize winner for the year of 2017 for his contributions to behavioral economics.)

In the same paper, professor Thaler argues that people generally have a tendency to value things more highly just because they possess them. He named this psychological phenomenon the “endowment effect.”

Thaler further explains the endowment effect using the following example:

“Mr. R bought a case of good wine in the late ’50’s for about $5 a bottle. A few years later his wine merchant offered to buy the wine back for $100 a bottle. He refused, although he has never paid more than $35 for a bottle of wine.”

The endowment effect is all around us, actually. The Economist recently researched how much were people willing to pay for legroom on a plane. When asked how much they’d be willing to pay for this comfort, the average response was $12. However, when asked how much they’d need to be paid to give up their own legroom, the average price was much higher – $39.

The reason? The endowment effect.

Why couldn’t Gollum let go of “his precious”? The endowment effect.

And so on.

In order for you to better grasp what causes it and how it works, I’ll share two scientific experiments involving this psychological phenomenon.

Scientific Experiments Confirming the Endowment Effect

1. The Mug Experiment

The mentioned professor Thaler, in cooperation with Kahneman and Knetsch, conducted an experiment to test the influence of the endowment effect on our decision making.

During the experiment, the scientists randomly divided people into two groups – buyers and sellers. As a part of the experiment, the sellers were given coffee mugs as a gift. Then, they asked both the sellers and the buyers to put a price tag on the mug – the sellers were asked for how much they would sell the mug, while the buyers had to decide how much they would buy it for.

The results? Mug-owning sellers placed a substantially higher price tag on the mugs than the buyers did. While sellers were willing to sell their newly-acquired mug for $7.12, buyers were willing to pay only a median price of $2.87.

The reason for such different evaluations? The endowment effect. People tend to ascribe more value to the things they already possess than to those they might possess. This leads to the so-called “loss aversion” (in this case, the fear of losing the mug).

2. The Lottery Experiment

Two researchers, Carmon and Ariely, decided to take the endowment experiments out to sports courts by testing how the endowment effect affects basketball fans.

Due to an unusually high demand for tickets, prior to every game, Duke University conducts a lottery for their fans who want tickets. Our researchers used one such occasion for their experiment. After the lottery, they reached out to those lucky enough to get a ticket and asked how much they would sell it for. They also contacted those who missed out and asked how much they would pay for a ticket.

The results? The average selling price ($2,400) was 14 times greater than the average buying price ($175).

When the winners were asked to give their reason for putting such a high price tag on their tickets, they said that this game really meant a lot to them and they didn’t want to miss it – loss aversion strikes again.

So, what causes the endowment effect?

There are two main reasons behind the occurrence of the endowment effect:

• Ownership
• Loss aversion

Initially, most behavioral psychologists and economists asserted that the endowment effect occurs because people are inherently loss-averse. According to those, it’s in human nature to ascribe more importance to losses than to gains. And that leads to the endowment effect.

More recent studies show that ownership of an item creates a link between that item and our identity. Again, leading to the same outcome – the endowment effect.

But what does a psychological phenomenon like this has to do with marketing and sales? Just about everything. Being familiar with certain aspects of human psychology and behavior can be vital for most of your marketing efforts. For example, it can help you create landing pages that convert or generate more leads using quizzes.

3 Ways You Can Take Advantage of the Endowment Effect to Boost Conversions

1. Use the power of giveaways

One of the most common ways to kick-start the endowment effect with your customers is to give them something for free, just to get them to start using your products or services. By owning your product or service before even having to pay for it, you’re creating a sense of ownership from the very beginning.

You can create your giveaway around a free coupon, some free balance for using your service, a sample product, and so on. No matter what you choose, your giveaway will lead people to start ascribing more value to your giveaway, your brand, your product or service – more than those objectively deserve. All thanks to the endowment effect.

2. Offer a free trial of your product or service

In the online world, it’s likely to be a free trial. In the outside world, it can be a lot of things, but the point remains the same – you give your potential customer an opportunity to try out your product or service for free, hoping that they would eventually become a paying customer.

If you own a car dealership, for example, you’ll offer a test drive. While taking a car for the test ride, your potential buyer already starts feeling like the car owner and, as a result, they are more likely to spend money on it. Endowment effect 101.

Apple does something similar in their stores. One of the main reasons their average store generates an annual income of $5,600 per square foot and attracts 20,000 weekly visitors? The endowment effect. What they do is let people play around with their products for as long as they want (in store, of course). By doing so, Apple creates ownership experience, which makes it more likely for people to actually become owners of their products.

A free trial is one of the most common ways software companies acquire new customers. Of course, getting users to try your product or service for free and getting them to actually pay for it are two completely different things. Once you get them to sign up for a free trial, you need to make sure you offer them a quality product or service that will make them stay as paying customers.

That’s exactly something we at LeadQuizzes strive to do at all times. Check out our free trial offer and get ready to experience the endowment effect firsthand!

3. Offer a freemium version

What’s a freemium? Investopedia defines it as follows:

“Freemium is a combination of the words “free” and “premium” used to describe a business model that offers both free and premium services. The freemium business model works by offering simple and basic services for free for the user to try and more advanced or additional features at a premium.”

But how does that differ from a free trial? Well, free trial usually gives you full access to all features and services, but for a limited period of time. Freemium, on the other hand, gives you access to limited features and services for an unlimited time.

Using the freemium version of your service will create the endowment effect with your users. After that, it’s up to you to convince them that premium is worth their while (and their money, of course).

In addition to being present in every sphere of our daily lives, psychological phenomena such as the endowment effect or the bandwagon effect present important concepts in marketing as well. Hopefully, this article will be a good starting point for you to start using those to boost your own business.