Siting (or endowing) the House Plan

My husband and I have been looking at building a new house and our weekends have been swallowed up trawling through display home after display home across our city. What has become very obvious to me from these weekend marathons is that the display home sales teams are the ultimate Jedi Masters of Endowment.

The endowment effect is a powerful bias whereby people value things they feel ownership over much more than the same item or offering if they don’t own it.

And don’t these guys know how to use it!

Their primary objective is to visually place the beautiful house you’ve just walked through onto your own block of land as quickly as humanly possible. In fact, some sales people will look up your block of land on publicly available websites to start the process off before they’ve even asked for your name, and mere moments after you’ve met. And they’ll also kindly prod you to think about designating rooms to each of your children, and working out where you can have that little morning coffee nook in the sunshine. Can you feel that gorgeous morning sun from your East facing deck on your face yet?

These Jedi Masters know that the more they can get you to connect or feel ownership (or a sense of endowment) over this new home, the more you are likely to be willing to pay for it.

Of course they want this to happen BEFORE any more firm discussions on pricing. That’s because they know that you’ll be prepared to pay more if you feel that sense of ownership or ‘endowment’. That’s just as well because usually the beautiful house you walked through has all the ‘premium’ inclusions that end up doubling what they call the ‘base price’ – and that’s before adding the cost of anything outside the four walls. Who needs a driveway or a letterbox anyway?

Try or play before you buy are other examples of endowment effect methods.

Aside from display homes, there are a myriad of examples of companies leveraging the endowment effect. For example, some car companies allow people to take their cars for weekend test drives; and some mattress companies let you take the mattress home for 100 days to try them out. Apple stores let you play for as long as you want with their products in the Apple stores. That’s right – they want you to feel some sort of ownership over their product or service – so that you will pay more for it. That’s the ultimate goal of these endowment effect techniques.

The endowment effect happens because we are programmed to avoid loss.

One key explanation behind the endowment effect is our natural bias towards loss aversion. We are twice as likely to avoid a loss than to work for the same gain. This is because in our early days it was much more important to avoid being caught by a predator, than to be preparing for a period of famine that may or may not happen in the future. So we react much more strongly to the potential of losing something; in this case ownership over something (even just psychological ownership), and therefore give it higher value.

Once you own a mug it becomes twice as valuable.

The most famous example of the Endowment Effect is the coffee mug experiment by three economists called Richard Thaler, Daniel Kahneman and Jack Knetsch – three economists at Cornell back in the 1990s. In the experiment they gave a group of students a coffee mug and another group nothing at all. They then asked each person to set a price on the coffee mugs.

Those that “owned” a mug set an average sales price of $5.25; those that didn’t own a mug set buy prices of between $2.25 and $2.75. The mere act of owning the mugs led the “owners” to more than double the price.

This experiment was a great example of how it is much harder to give up something we own (avoid loss) than to buy something new (gain).

“Freemium” products are designed around the Endowment Effect.

Another common use of the endowment effect is by software providers such as Thinkific, an online learning platform that we at Nudge By Design use for our online courses. Thinkific, like many providers, gives you access to what’s called a Freemium product – a basic version of the software that you can use for free to set up basic online courses. Once you start customising your learning site however, some of the features that you end up wanting to use are not available on the free package and you’re encouraged to upgrade to a paid version. This also is linked to the behavioural science principle of the sunk cost fallacy: people are more likely to plough ahead with a project or purchase when they’ve previously invested resources like time, money or effort – they’ve already sunk effort into it, so it’s harder to walk away. The sunk cost fallacy is related to the Endowment Effect.

How to apply the endowment effect to your product or service

One way to leverage the endowment effect is to give your prospective customers a sense of ownership by giving them something they can own or feel they own right away.

Some ideas:

• A product test drive – in store, or let them take it home for a period
• A free coupon or free balance or trial period to start using your services
• Allow customers to personalise products or services – for example choose a name, or picture or colour
• Provide checkout basket reminders – it’s almost yours
• Offer a bidding system like ebay or auction
• Low entry cost into a category where the customers need ongoing supplies e.g. coffee machine with capsules, printer and ink
• Help visualise the product or service experience e.g. virtual walkthroughs, virtual change rooms

As your customers start to feel a sense of ownership over your giveaway – usually more than it actually deserves – they’re more likely to convert into paying customers.

In our case, despite being armed with deep knowledge about the endowment effect, my husband and I are finding it harder to walk away once we’ve seen a beautiful house plan on our block of land and can imagine the outlook from the bright, open plan kitchen into the perfectly manicured side yard.

The plan is really just a piece of paper, but feels more like a Jedi Mind Trick!

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