Mine Is Worth More Than Yours
Richard Thaler, a classical economist turned behavioural economist, coined the phrase – ‘endowment effect’. The endowment effect occurs when people value a product more when they own it than when they do not.
Inconsistent with traditional economic theory, Thaler’s theory highlights just how irrational consumers can be. The relative value of a product owned by an individual is very often higher than an equivalent product that they don’t own. Common examples of the endowment effect include:
• People asking more to sell a business than it is worth.
• Consumers prepared to spend vast sums maintaining a favourite car.
• Consumers expecting more for a trade in motor vehicle than it is worth.
The endowment effect suggests that products do not have an absolute value and that the value of a product depends on the context, and one context is whether you won the product. One recent study found that people can overvalue products by as much as 2.5 times – where value is a comparison between what they want and what they would pay for an equivalent product.
There are several implications of the endowment effect for marketing. The endowment effect can:
• Make consumers reluctant to part with items they already own (say a trade-in), even if the replacement product offered is better or more cost-effective.
• Foster attachment to a brand, causing increased loyalty and retention and referral - enabling loyalty programs, personalised experiences, and exclusive benefits to strengthen the bond between customers and products.
• Mean that messaging should be customised to how consumers perceive ownership. Marketers can emphasise the gains instead of emphasising the loss of their current possession.
• Cause consumers to feel a stronger adverse reaction due to their higher perceived value of possession, meaning that complaints need to be handled with sensitivity and empathy.
• Influence cross-selling and upselling efforts, with customers more receptive to purchasing complementary products or upgrading their existing ones if they feel a sense of ownership.
Consumer behaviour can be impacted by one or more of 25 plus cognitive biases – many of which can impact purchase behaviour. The endowment effect is just one of the biases that must be understood, accounted for or leveraged when developing strategy.
John Carlson – Marketing Consultant Perth.
Maximising performance through ethical customer-centric marketing, branding, and communication.
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For more marketing information and to understand the concept of greenwashing in marketing, visit my website at www.djohncarlsonesq.com or email me at [email protected].
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