What is the endowment effect, and how can it increase your conversion rate?

The endowment effect is another well-selected psychological theory that focuses on why people value objects higher if they own them. By the time they say they own the particular item, in fact, they possess it to the highest level possible. Business firms from all over the world use this principle to encourage customers to make purchases, and therefore sales are likely to increase.

This is where brand storytelling comes in—telling a story around a product makes customers feel as though the product belongs to them, which would amplify the endowment effect.

This ultimate guide will help you clearly understand the endowment effect—what it is, how it works, and how businesses can extend it to customers. It will also offer practical examples and business solutions that help provide a clear and grounded explanation of this principle to your business.

Table of Contents

1. What Is the Endowment Effect?
2. How Does the Endowment Effect Work?
3. Why Is the Endowment Effect Important for Businesses?
4. How to Use the Endowment Effect to Boost Sales
5. Case Studies: Companies That Use the Endowment Effect
6. Tips to Apply the Endowment Effect in Your Business
7. The Science Behind the Endowment Effect
8. Conclusion

What Is the Endowment Effect?

The endowment effect is a form of confirmation bias that makes people overvalue the objects they consider as belonging to them or should belong to them. For instance, the attire we see in a store, the wristwatches we put on in the store, or the car we take for a test drive makes us feel owner-like. This feeling of ownership brings you closer to the item, and you almost find yourself unable to leave without making the purchase.

Psychological studies show that compared to an ad offer price, which people are willing to pay for an object, they are willing to give a higher dollar amount in order to sell off the object. This happens because you become possessive of the thing you own, and hence, the thing appears to be of more importance than it is in reality.

How Does the Endowment Effect Work?

The endowment effect is the ownership effect in psychology. Even the last action, such as sniffing a certain product or thinking of its application, may stimulate this effect. Here’s how it influences consumer behavior:

1. Ownership Creates Value

Simon and Nelson observed in their research that when an individual begins to identify with an object, that object gains more value. For example, a person who is given a chance to test a shaft of a certain car may feel it is his or her car even though he or she never bought one. What builds up friendship stature is the feeling that accrues between two people, whim the unfortunate among them find it hard to say no to those for whom they have an affinity.

2. Loss Aversion

People are uneasy about loss if it is what they believe they should possess. Customer appreciation or value of experience is created under the consideration that once a customer has used a particular product, he or she will not reclaim such experience or benefit if he or she does not continue using the product. This fear makes them go through with the purchase.

3. Emotional Attachment

In many ways, whether it’s through the sense of touch, through the use of a product sample, or being able to mentally incorporate them into one’s life, the consumers start to develop feelings towards the product. This connection makes them to be interested in using the particular product for a long time. How to build brand loyalty relates well with this since customers are likely to continue doing business with a certain brand to which they have an emotional attachment.

Why Is the Endowment Effect Important for Businesses?

Understanding the endowment effect is crucial for businesses as self-ownership influences consumers. By creating situations where customers feel a sense of ownership, companies can:

• Increase Sales: The idea of customer experience reveals that customers are willing to buy products that they feel strongly about.
• Reduce Abandoned Carts: Once a product is added to the shopping cart, it will be embarrassing for the customer to leave it behind.
• Build Loyalty: Whenever customers think that a given brand identity belongs to them, they are likely to continue patronizing that brand, and this is what is known as repeat business.

How to Use the Endowment Effect to Boost Sales

Here are some effective strategies businesses can use to trigger the endowment effect and increase conversions:

1. Offer Free Trials or Samples

Samples or trials give the clients an opportunity to test a specific product before purchasing it. This makes them feel they are undertaking a trial run before having to make a full purchase once the trial period is over.

• Example:Spotify provides a 30-day free trial of its paid functions. While the trial is ongoing, the users who fund its development can use the app without ads and with additional functional abilities. When the trial offer is over, most consumers become a little more emotionally attached to these benefits and opt to pay for them.

2. Encourage Customers to Personalize Products

Personalization also enables customers to create a product of their own making, which in turn makes customers develop an attachment to the product.

• Example:Nike’s “Nike By You” customization model allows clients to choose the type of shoe, colors, and materials to be used, among others. This makes the shoes appear very unique, and all customers would want to have a pair of theirs.

3. Use the “Add to Cart” Feature Effectively

The moment customers place the products they want in the cart, they develop some sense of ownership. Facilitate this step by ensuring it is simple for the end user to store an item in their cart/wishlist.

• Example:Amazon’s “Add to Cart” button makes it more likely to buy because it gives a small idea of possession. At the same time, when a customer makes a search on a particular product, he or she can return at any time and make a purchase.

4. Create a Sense of Urgency or Scarcity

Temporary promotions such as ‘buy now’ and ‘only a few units in stock’ can create a perception that an item is priced appropriately. This is why customers who feel that they might lose an item are more likely to purchase it.

• Example:Further, on the same site as Booking.com, for example, there are messages that aim to inspire customers to make decisions: “Only two rooms at this price are available!” This applies because it uses the endowment effect alongside the fear of losing out or FOMO.

5. Implement Loyalty Programs

Such promotions motivate clients to continue making orders with the firm through loyalty programs. This helps create responsibility and pride in the incentives they receive, which gives them a longer retention rate. How to Increase Brand Awareness is also supported by these types of promotions, as they create repeated engagement and a sense of familiarity with the brand. 

• Example:Currently, Starbucks's loyalty program gives customers stars for every purchase. These stars can be cashed for free products, making the customers feel appreciated and compel them to buy the products again.

6. Allow Try-Before-You-Buy Options

Allowing customers to touch the product or sample it before buying instills a lot of emotion in the mind of the customer.

• Example:Apple offers people the opportunity to use its products in stores. Whether it is an iPhone or a MacBook, the mere feeling of handling the product resonates with a lifetime sale, as customers are more likely to get one.

Case Studies: Companies That Use the Endowment Effect

1. Netflix

The field also has Netflix, which provides a standard free trial for new consumers. In the trial phase, users become content with the recommendations, and it becomes difficult for them to consume excessive content. This is one reason why many users, by the time the trial is over, are ready to start paying for the Netflix subscription as if it is part of their regime.

2. Zalando 

Zalando allows customers to wear clothes and make purchases without having to go to the store. In most cases, you can return the clothing for free. This strategy helps customers feel that they already own the clothes, so they do not return them, and sales increase.

3. Decathlon 

Decathlon also allows customers to try out the sports equipment throughout the facility. For instance, holding a bike or a pair of hiking boots psychologically gives customers ownership and thus makes them buy.

4. Warby Parker

Warby Parker, the eyewear manufacturer, allows its customers to select up to five frames and then make a purchase. This allows the customers to relate to the products and increases the conversion rate.

Tips to Apply the Endowment Effect in Your Business

Want to use the endowment effect to grow your business? Here are some practical tips:

• Offer Risk-Free Trials: It is advisable to allow customers to taste your product but under conditions that they have no obligation to purchase. Free trials, free samples, or money-back guarantees are perfect.
• Make Personalization Easy: Let customers select the specifications they want in the products they order. This creates a feeling of ‘ownership’ of the product that it buys among customers.
• Use Low-Stock Alerts: Indicate when a product is out of stock. This puts pressure on the customers by creating the feeling that something has to be done.
• Reward Loyalty: Implement a frequent buyer’s scheme so that customers feel akin to investors of the brand.
• Promote Cart Abandonment Emails: If someone abandons items in the cart, a reminder should be sent. Point to the product and reassure them of how much they need to own it to complete their purchase.

The Science Behind the Endowment Effect

The endowment effect is rooted in two psychological concepts:

1. Ownership Bias: It will also be appreciated that people give higher per unit value to those items that they possess and or are associated with.
2. Loss Aversion: It is also proven that people have mirror overemphasized the desire to lose something as compared to gaining something.

Altogether, all these aspects make the endowment effect an effective means of changing a consumer’s behavior.

Conclusion

The endowment effect, therefore, is a general truism that can guide companies in increasing their sales and customer base immensely. Find out how free trials, personalization, and urgency help in ownership and see how companies can actually make a product more attractive to customers.

Now, you can use the strategies and examples described in this guide to incorporate the endowment effect into your marketing, enhance customer bonds, and elevate your conversion rates.