Question

This is how the endowment effect works in marketing

Answer 1

What is the endowment effect?
In practice: examples of the endowment effect
The endowment effect on marketing

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This is how the endowment effect works in marketing

The endowment effect, known in English as the endowment effect , describes why people attach so much value to their possessions. This effect is what makes us give a greater value to a possession (for example, something we have just acquired) by the mere fact that it is ours, even temporarily. This approach, which in itself seems irrational, actually makes sense from an evolutionary point of view. How does the endowment effect influence marketing?

Index

1. What is the endowment effect?
2. In practice: examples of the endowment effect
3. The endowment effect on marketing

What is the endowment effect?

Definition: Endowment effect

The endowment effect in English is a cognitive bias that describes the unconscious value we place on our possessions. Various studies have shown that we attribute more value to the goods we own than to other similar products..

The existence of the endowment effect has been proven in repeated experiments and it is one of the many cognitive biases with which we are confronted every day. Cognitive biases are perceptual errors that occur systematically and that various studies have corroborated as a repetitive effect or distortion (bias).

In the marketplace, people do not always behave in an objectively austere and economically efficient way, but are driven by a series of unconscious effects . A clear example of the endowment effect is that we attribute to our possessions a greater value than they actually have in the market. This trait was first described in 1980 by the American economist Richard Thaler in his article Toward a Positive Theory of Consumer Choice . Thaler developed this concept from the so-called perspective theory of Daniel Kahneman and Amos Tversky. In this theory, there is also another known cognitive bias that plays a major role: loss aversion ..

The endowment effect is especially accentuated when the object in question also has a sentimental value , which is added to the real value. Even things that objectively have no measurable value receive a quantifiable market value thanks to this cognitive bias.

In practice: examples of the endowment effect

A good example of the endowment effect is the price of some shares that are falling. The negative big picture is reinforced by the cognitive bias of loss aversion: shareholders hold on for too long to the stocks they own that are sinking, because they are afraid of losing them . They attach greater value to stocks simply because they own it. However, the economically sound decision would probably be to sell them as soon as possible to minimize losses and then possibly buy new shares..

In the marketing sector, for example, the endowment effect is exploited through the periodic delivery of coupons : since the consumer already owns a part of the product or service, they are offered, for example, a discount of ten euros, and so will be more predisposed to invest money in the brand. Promotional gifts also work the same way.

In the end, all the examples of the endowment effect are summed up in one sentence:? Possession creates value ? We could say that the endowment effect is the difference between the willingness to accept ( willingness to accept ) and WTP ( willingness to pay ). The same person can assign two different values ​​to a product depending on whether that product is his or not. In practice, this often causes a difference in value, and therefore also in price.

So it makes perfect sense in the world for a sector like marketing to want to take advantage of the endowment effect. If we take a brief look at the past from an economic point of view, we discover something even more revealing. Apparently, in the past, people with a strong endowment effect prevailed in the exchange of goods, since they were less willing to give up their possession (merchandise, money or another type of object or service that could be exchanged) than those with a less marked endowment effect.

The endowment effect on marketing

The importance of the endowment effect lies in the relevance it has in a large number of fields. However, it takes on a special meaning in marketing, sales and, in general, in everything related to the purchase, sale and valuation of goods. Some? Classics? of the endowment effect are driving tests , trial months , free subscriptions and any other type of product test . This is because the endowment effect already intervenes even if we only have something temporarily , which can obviously be used in direct marketing. However, does it also work in online marketing and commerce, where goods are not physically owned?

For digital products, virtual proofs, and products that only consist of an application or software as a service, the endowment effect is less. In these cases, it is recommended to send the customer something that he may? Own? as soon as possible and it makes sense to plan the marketing structure so that the user can interact with the product as much as possible during a free trial phase.

In online retailing, this is simpler: once they have received the merchandise, customers are more willing to accept significant price increases, as they have seen the value of the product for themselves and do not want to do without the. No wonder words like? Yours ?,? Yours? or? mine? have an almost inflationary use in marketing. The customer does not have to have it: just imagine what it would be like to have it. For this reason, illustrations and examples are very helpful, such as videos, images and texts that give information about the manufacturing process and the history of the product as a way to bring the products closer to your future customers.

On the other side of the coin, a realistic assessment of market value (for example, with real estate or automobiles) works best, logically, if the psychological implications of the endowment effect are known. Furthermore, the extent of the endowment effect from a numerical point of view is not known for sure; we only know that there is a clear tendency to overvalue possession . This is also one of the reasons why it is so important to hire experts or experts for evaluations: this way we avoid errors of judgment due to the endowment effect. After all, external experts are not owners and are therefore better able to make an objective assessment.

advice

There are other psychological effects that are used effectively in marketing: if you know the carry-over effect, the confirmation bias or the lure effect, you can better target your efforts in this area.

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