Today we will be digging in on the endowment effect. This concept is similar to a few you have heard on the show before, including loss aversion, the IKEA effect and even a little bit of reciprocity mixed in there. While they are similar, they are not the same.
The endowment effect is super impactful for all kinds of businesses. Everything from physical products to services, online versus brick and mortar shops; all can use the endowment effect to improve sales. And, yes, this even comes up when discussing change with members on your team (which I won’t really get into today, see the Change Management episode link below for more on that). Listen to this episode and download your freebie worksheet to get tips for how you can use the endowment effect in your business.
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- [00:41] In this episode, you’ll learn what the endowment effect is, how it works, and tips on how you can use it.
- [02:15] EXCITING NEWS! This week, an article came out in Psychology Today called 21 Psychology Podcasts Every Businessperson Should Listen To. I’m so honored to say that The Brainy Business made the list!
- [03:04] In its simplest form, the endowment effect teaches us that we value things more when we own them (or have perceived ownership over them). To put it another way, we like our stuff more than other peoples’ stuff.
- [03:21] It is incredibly easy to trigger the endowment effect. Even a slight change in words can make a huge impact.
- [04:00] By saying, “You will notice when you go to check out the article…” I am triggering the endowment effect. Making it personalized by using the word “you” makes a difference, but also saying, “when you do this thing” is really powerful for triggering perceived ownership in the brain (versus “if” you do this thing).
- [05:07] One very simple language shift that makes a huge difference when applying the endowment effect is the swap from “if” to “when.”
- [06:08] The endowment effect is very closely linked to loss aversion, but as I said at the top of the episode, they are not the same thing. It makes the possibility of loss more apparent or clear in your mind. It makes it so you are more aware of losing something.
- [06:47] When you are given something or interact with it, your brain takes some ownership over it. It can become a part of your identity as the endowment effect takes place. You don’t need to have physically purchased it or technically own it for this to happen.
- [08:07] The first thing you are given will act like the anchor that you are more likely to take ownership over and we aren’t the only animals impacted by the endowment effect. Do monkeys prefer peanut butter or juice? It depends!
- [09:34] Being given the item first and told it was yours made it so it was worth more to you and you didn’t want to get rid of it.
- [09:57] If you keep giving people things, there is no potential loss of the items they have so the endowment effect doesn’t have much of an outward impact. It is only when that trade is presented and they need to give something up that we really see it in action.
- [10:24] Many businesses are set up so you earn things like credits. They may keep accruing and if you ever stop paying you will lose them all. That little twinge will keep you paying often for things you don’t really use.
- [13:36] Building the endowment effect into your programs can keep people motivated to stay. Ideally, you are also providing great value for them when they use it, but the endowment effect can help carry them through the valleys where they might be less active because they don’t want to lose out on the progress they have made so far.
- [14:06] Physical touch has a big impact on the endowment effect.
- [14:40] Great high-quality pictures and videos can trigger mirror neurons of someone else engaging with the product, which can help your business get the benefit of the endowment effect.
- [14:52] Another way to really trigger the endowment effect, both for product and service businesses, is to use the word “imagine” or “picture this.” I also use really strong questions to help someone see the experience and live it a little bit.
- [16:24] Getting someone excited about the prospect of owning something can actually help them to enjoy it more when they do own it, which is a good thing.
- [17:39] Help the right people to find the best products and services for them and make it an irresistible offer. Using the endowment effect can help you do just that, andl help them truly love you, your business, and that item after they’ve bought.
- [18:01] Say you hear often from potential customers that your they’re concerned about the price of your offer. If you know this is a common concern, it can be valuable to trigger the endowment effect to help them to see that as an expense that is worth it to them before they even voice the concern.
- [19:50] One of the main reasons a money-back guarantee works is because of the endowment effect. If I know I can try the thing out and get a refund down the line no questions asked, I’m more likely to try it (and less likely to return it because of the endowment effect).
- [21:15] Melina summarizes her tips about the endowment effect – download your worksheet to practice them!
- [23:32] I’m excited to announce that my first book, What Your Customer Wants (And Can’t Tell You) is officially on presale and available on Amazon and Barnes and Noble (links below) so you can buy today! The book officially launches on May 11, but buying now guarantees you’ll be one of the first to receive this book in print when it’s released.
- [24:25] And, if you are interested in being part of my launch team to help promote the book (and maybe get a sneak peek!) send an email to melina (at) thebrainybusiness (dot) com. There will be a limited number of these spots available, so act fast if you’re interested.
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More from The Brainy Business:
- Master Your Mindset Mini-Course
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Past Episodes and Other Important Links:
- 21 Psychology Podcasts Every Businessperson Should Listen To
- Neural Antecedents of the Endowment Effect
- The endowment effect. Annual Review of Economics
- Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias
- 10 Endowment Effect Marketing Examples for Retail
- Loss Aversion
- The IKEA Effect
- Tim Houlihan Interview
- Change Management
- Why Picking Something Up Makes People More Likely To Buy – On The Sense Of Touch
- A Behavioral Economics Analysis of Costco
- Anchoring & Adjustment
- Mirror Neurons