Five Ways the Endowment Effect Can Boost Online Sales
Kyle Hoffman, Director of Growth Strategy | January 24 2024
Have you ever been shopping, in-store or in-person, and put something in your cart just to think about it? You weren’t sure if you were going to buy it, but you wanted to think about it and see if you changed your mind. Did you end up buying it? You can thank the endowment effect for that.
The endowment effect says that we tend to attribute a much higher value to things we own simply because they are ours. Interestingly, marketers can leverage the idea of possession to make their product seem more valuable in their customers’ eyes.
In this article, we examine the endowment effect and provide five effective strategies for turning prospects into customers.
Understanding the Psychology Behind the Endowment Effect
The endowment effect refers to the tendency to assign more value to something that one owns than a similar item that one does own. This cognitive bias is why people are prone to valuing an item they already own and perceiving it to have more utility than it would have if they did not. This means that sellers often try to charge more for an item than it would cost elsewhere.
For example, let’s say you paid $100 for two tickets to your favorite comedy show, but unfortunately something came up and you can no longer go. You decide to charge $150 for the pair of tickets so you don’t feel like you lost out on anything.
The endowment effect is also why it’s hard to purge our personal items. We all get sentimental from time to time, but the sentiment kicks in hard when it comes to material things. Maybe it’s your college sweatshirt still hanging in your closet or an old, worn watch that was passed down from your grandfather. You couldn’t put a price on that watch, right?
We feel a sense of ownership and possession when it comes to things we own, and we attribute more value to those items that are already in our possession.
How to Leverage the Endowment Effect in Marketing
Marketers can take notes and leverage the endowment effect in their marketing campaigns. The trick is giving your customers something before they buy, so they will feel they own it and value it even more.
A great example is the “freemium” model. Service providers often provide prospects and new customers with a free introductory month or so of service before buying. Once you’ve downloaded an app or used a service for free, even for a short time, it becomes more difficult to give up, and you’re less likely to switch to an alternative.
Audible does this well – offering a free trial with access to audiobooks and podcasts. Canceling after the trial feels like giving up on something already obtained, leading some customers to continue with the subscription despite its cost.
But when it comes to e-commerce, the strategy is a little different. Interestingly, science shows people don’t have to own something for the feeling of ownership to be triggered. Just the mere idea or suggestion of possession can be enough to trigger the endowment effect. This is where the magic comes in – marketers really need to paint a picture of what it would be like to own a certain product.
Let’s say you’re shopping at Target, and you walk by a little table and chairs that would look great on your patio. Your husband starts to talk about how that set would be perfect for sitting outside in the morning, drinking a cup of coffee, and enjoying the sunshine. Suddenly, you imagine yourself sitting outside with a cup of coffee and feeling excited about it. Letting it go and walking away from the patio set feels painful.
This applies in clothing stores, too. Have you ever had a persuasive shop assistant encourage you to try on a dress and look at yourself in the mirror? They start talking about the different occasions you can wear the dress – from a summer picnic to a graduation party and so on. You start to imagine that dress in your closet and wearing the dress on different occasions. Again – letting it go and leaving it at the store is painful.
The endowment effect is based on one of the most powerful behavioral principles out there – loss aversion. Loss aversion says we hate experiencing losses almost twice as much as we value gains. In other words, you would be twice as sad if you lost $50 than if you found $50 lying on the ground.
Now that we understand the science behind the endowment effect, let’s put it into practice in the e-commerce world.
Five Ways to Use the Endowment Effect in E-Commerce
- Customization Options
Customization is one of the most powerful tools for triggering the endowment effect in e-commerce. When brands allow customers to personalize products, they feel a deeper sense of ownership and connection, increasing the likelihood that they will buy.
Nike has designed an entire platform dedicated to allowing customers to design their own shoes called, “Nike By You.” Customers can choose colors, materials, patterns, and more. The creative process triggers the endowment effect, making them feel more invested in the final product. They’re not just buying another shoe off the shelf. It's a shoe that “feels more like you.”
This level of customization creates a stronger emotional connection with the brand and demonstrates the power of personalized experience in e-commerce.
- Offer Free Trials and Samples
It’s not always easy for e-commerce brands to provide free trials of products, but Warby Parker proves it is possible. They came up with a smart and innovative way to leverage the endowment effect by encouraging customers to try five pairs of eyeglasses at home.
This allows the customer to feel the quality of the glasses and try them on from the comfort of their own home. Plus, they could imagine how it would feel to own them – how it would look with their hair a certain way or match their favorite outfit. This free trial hooks the customer in and suddenly they won’t want to let go of the product. They can imagine wearing them every day
- Loyalty Programs
Effective loyalty programs go beyond points and discounts. They tap into the psychological principles of ownership, progress, exclusivity, and personalization. Yes, that is a lot of a loyalty program to pack in, but it will create a deeper emotional connection with your audience, encourage repeat purchases, and turn shoppers into advocates.
For example, Abercrombie provides its members with points, which can be redeemed for real money. The reward points system feels less like a discount and more like earned currency, which creates a sense of ownership. The thought of losing those points, even with small cash redemption values, activates loss aversion, making them hesitant to leave the program or lose their accumulated "wealth."
Starbucks Rewards program allows customers to earn points, unlock rewards, and personalize their orders. The process of accumulating points and customizing drinks creates a sense of ownership and progress, making switching brands less attractive.
Sephora's Beauty Insider program offers flash sales and early access to exclusive products for members. Once customers have experienced the thrill of getting these deals. The ongoing sense of achievement and ownership strengthens their connection to the brand and makes switching to someone else feel like starting over, losing all that progress.
- Reframe Discount Language
An easy way e-commerce brands can use the endowment effect is to load in discounts automatically, so the customer feels like they “own” them. When you offer your customers a discount or any other benefits, frame it as if it’s already theirs and all the customer needs to do is use it or activate it.
Another great example of the endowment effect is described by Ned Welsch from McKinsey. An Italian telco company offered customers who wanted to cancel their service 100 free calls. The offer was positioned as “If you continue your service with us, then we’ll give you 100 free calls..” But the “if, then” statement did not work. The company tweaked the offer slightly to say, “We have already credited your account with 100 calls – how could you use those?” and retention rates increased as people feared losing out on the 100 free phone calls.
- Paint a Vivid Picture for the Consumer
Painting a picture and allowing the customer to imagine what it would be like to own your product is so important.
Take Zillow, for example. Everyone, whether they are shopping for a new home or just browsing, loves looking at homes on Zillow because it’s fun, right? Why is it fun? Because we want to imagine what it would be like to live in that home. We picture ourselves walking up the stairs to the primary bedroom or using the big soaker tub in the bathroom. Zillow is wildly popular because it allows prospective homeowners to vividly see what life would be like in a home.Casper, a popular mattress company, does a great job of using high-quality visuals, immersive and interactive experiences, and storytelling to create a sense of ownership and increase desire. When you’re shopping on their website, you can picture the mattress in your bedroom and crawling into it at night.
Source: West Elm
Many furniture stores allow you to visualize furniture in your home before purchasing it. For example, West Elm has a room planner tool that allows you to drag and drop your favorite furniture to see how it fits in your space. This allows you to see how different pieces look and allows you to compare scales in real time.
The takeaway? Marketers and e-commerce brands can use high-quality visualization tools and videos to help paint a vivid picture of their products. This will provide a unique shopping experience, leading to happier customers and stronger sales.
Leveraging the Endowment Effect in E-Commerce
By understanding and leveraging the endowment effect, e-commerce brands can create a deeper emotional connection with their customers and boost online sales. The key is to shift your focus from temporary discounts and flash sales, and to create an experience that fosters a sense of ownership, progress, and belonging. Personalization, customization, loyalty programs, and high-quality visualizations tools and videos are a great way to start.
Looking for more ways to connect with your audience on a deeper level and drive sales? Get in touch with the experts at Function Growth. We’re believers that consumer behavior lies at the heart of how all great brands grow. Contact us today to see how we can take your brand to the next level.