Home Theories Endowment effect

Endowment effect

Reviewed by expert Scientifically proven

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.

Table of contents:
  1. Why Does the Endowment Effect Exist?
    1. Loss aversion
    2. Reference dependence
    3. Neoclassical effect
  2. How to use the Endowment effect in e-commerce for Conversion Rate Optimization (CRO)?
    1. 1. Copy
    2. 2. Abandoned Cart emails
    3. 3. Give away Free Stuff
    4. 4. Embed Haptic Imagery to your website
    5. 5. Embed Virtual Reality/Visualization
    6. 6.Embed honest product reviews to your site
  3. Conclusion

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.' Brian Knutsun's study on the neural activity in the brain found that the Endowment Effect 'enhances the salience of possible loss.'

Endowment Effect Neuron

Endowment Effect Neuron - 2

Source: Neural Antecedents of the Endowment Effect

This shows up when we think of the loss of selling something we own over its actual selling price.

This is also why people refuse to pull out of trading stocks or cryptocurrency. Losses on the sale are perceived to be worse than any potential gains.

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)?

Down below are different examples in different situations on how to use the Endowment effect to your advantage.

1. Copy

Use copy to embed endowment effect. Instead of 'Imagine your life owning x product', you can say: 'And now, it's nearly yours.' Nearly is an interesting word here. It makes the reader think they already own the product. It implies the visualization we want our copy to achieve. At the same time, it prevents our copy from being forceful. We don't want to force our customers to purchase; that would just lead to buyer's remorse.

One of the best examples of the Endowment Effect in action is Apple. Think back to how the landing page for the iPad was done. For a product starting at $400 in 2012, there was no mention of the features or tech specifications until the very end of the page. Instead, the copy and visuals focused on how the iPad will 'feel' in your hand. Does the feeling of a tech product really impact its performance? Not at all. Was this a successful strategy by Apple? 100%. Readers could visualize owning the product. They could imagine their life with it. It created a sense of ownership before the product was even bought or its price justified.

2. Abandoned Cart emails

Abandoned Cart emails are a great example of the Endowment Effect. You haven't purchased the product yet; you added it to the cart and left it at that. The emails encourage you to complete your purchase, making you feel like you've already taken the first step. You already 'own' the product, and now you just have to give some additional details to get it in your hands.

3. 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.

4. 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.

5. 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.

6.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.

A new cognitive bias in your inbox every week

You'll get to learn more about CRO and psychology. You'll be able to take experimenting to a whole new level!

* We send our mails on Monday morning btw.

References

The references contain experiments and studies that prove this bias is there.

1. Explanations of the endowment effect: An integrative review
2. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias

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

Do you think you know enough about CRO?

Join our monthly mailing to continue learning more and more about CRO and psychology.

-->