Endowment effect

Theory explained by Sander Volbeda and written by Daniel Kahneman, Jack Knetsch & Richard Thaler

We tend to prefer and value objects that we already own over the objects we don’t. As a result, we don’t like to give up on something we already have a bond with for something new. This is referred to as the ‘Endowment effect’ in psychology. Designers apply this concept on web designing to retain existing customers. For example, imagine that you have been given complete free access to an online tool including all the features for a period of 7 days. While using the tool, you will feel a sense of ownership during the trial period which is the objective of the service provider anyways. Once the trial is over and if you’re really satisfied with what you’ve been given, there’s a great chance that you will pay a fair price to continue the subscription. This is why most of us find it difficult to switch between brands. We value what we already feel the bond with rather than something completely strange. Therefore, the Endowment effect can be used for, streamlining user experience on your e-commerce site Conversion Rate Optimization (CRO) and, fostering brand loyalty.

Why Does the Endowment Effect Exist? 

It’s important to know why the Endowment effect exists if you’re to take the maximum advantage of it. Learning consumer behaviour is vital to tackle them appropriately. 

Loss aversion 
The pain of loss is twice as strong compared to the pleasure of an equal gain. This nature of human psychology is known as ‘loss aversion.’ 

Reference dependence 
We experience the weight of loss greater than the weight of an equal gain which is known as ‘Reference dependence.’ 

Neoclassical effect 
This talks about the nature of us in which we don’t welcome change and therefore in such a situation we expect to be compensated more highly on behalf of the efforts of changing. 

How to use the Endowment effect in e-commerce for Conversion Rate Optimization (CRO)? 

1. Give away Free Stuff  
It could either be a physical product or free chance to experience an online tool, a service etc. During the period we use the free stuff, we build some sort of a bond with it and when the time comes to give it up, we tend to decide to use it continuously by paying a price. 

Giving away free stuff can be done differently by offering a free return policy. According to psychologists, unless a person has a faulty product, there’s a very less possibility that he/she may return a product for any other purpose. This is because we feel a sense of ownership once we obtain an object and our unwillingness to get rid of what we already possess. But, by offering a free return policy, you can present yourself with authenticity to attract more customers for CRO. 

Real-world practice: Shopify web store 
Shopify offers its customers with free trials and lessons on their services. This way, customers build a kinship with the site and tend to retain with them without moving to a similar service provider. 

2. Embed Haptic Imagery to your website 
Haptic imagery creates a sense of touch to create a tactile experience from your website. The ultimate target should be to make the people feel that they’ve been endowed through rich haptic imagery. To give a more personalized experience, you can, 

  • Localize your website
  • Give very descriptive step by step instructions on your products or services, so your customers can feel what you have to offer.
  • Embed tailored messages for each visitor to make them feel a sense of kinship

Real world practice: Lush website
Lush makes sure that all their visitors are given the whole experience of using their skincare products. High-resolution images used in the site show the visitors with clear before and after-effects of the products. They even talk about how the products should be used and how they add great value to your skin. Through these clear imagery and text descriptions, they generate tactile experience for people to build kinship with their brand.

3. Embed Virtual Reality/Visualization
Enabling your customers to visualize themselves using your products, creates a great effect on them to build a kinship with you. This can positively influence their purchase behaviour. Let the users interact with your products in the means of,
 
  • Changing the colour of the products
  • Pinching to view the products in different angles
  • zooming in and out

Real-world practise: Wayfair home decor website
The website of Wavfair consists of a cool feature where the customers can move the Wavfair products around virtual reality (VR) space to see how they would look in a real room. This would ideally create a sense of possession in the minds of the customers by taking the maximum advantage Endowment effect.

4.     Embed honest product reviews to your site
A product review is an ideal representation of what others have experienced with your brand. Another user talking about your brand creates a much more familiar effect in the minds of other customers. When a person talks how well he/she has been served by your brand is honestly much more compelling than a list of product features presented by you. Product reviews too can create a tactile experience of what you have to offer.
 

Conclusion

Studying how the Endowment effect affects purchase behaviours and applying it to your e-commerce website can drive more and more traffic towards your business. All the top tips we briefed for you to create a tactile user experience can’t be overlooked to generate a sense of ownership/ possession in the minds of the target customers about your brand. The stronger the bond you build with the customers, stronger the retention level and loyalty will be to boost Conversion Rate Optimization.
 

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Books

Would you like to go more in-depth? Here are our recommendations:

The Paradox of Choice: Why More Is Less by Barry Schwartz Buy this book
Misbehaving: The Making of Behavioral Economics by Richard H. Thaler Buy this book
Thinking, Fast and Slow by Daniel Kahneman Buy this book
Dollars and Sense: How We Misthink Money and How to Spend Smarter by Jeff Kreisler Buy this book

Sources

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