Why your sales team needs to learn about Endowment Effect

6 min readJul 7, 2021

What is the Endowment Effect?

The observation that people ascribe greater value to things, with which they have a sense of ownership, called in behavioural psychology as the “Endowment Effect“, has had a major impact on marketing strategy in the last few decades. Richard Thaler, a Nobel laureate, in 1979, first identified the Endowment effect as an example of how a sense of ownership, even if notional, can affect the choices we make. (here is a link to the original research paper by Thaler)

Thaler explains the endowment effect using the below example:

“Mr. R bought a case of good wine in the late ’50’s for about $5 a bottle. A few years later his wine merchant offered to buy the wine back for $100 a bottle. He refused, although he has never paid more than $35 for a bottle of wine.”

This effect is all round us in our everyday lives. The Economist recently surveyed how much were people willing to pay for legroom on a plane. The average response was $12. However, when same group was asked how much they’d need to be paid to give up their own legroom, the average price was much higher — $39. Studies at car dealerships have shown that offering test drives, where the customer gets a mini experience of ‘owning’ and driving the vehicle, increases the closing ratio by upto 15%.

Have you ever tried to clear out that old cupboard with the worn out college backpack, that old shirt with more holes than buttons, and other belongings you haven’t used in ages? If it didn’t go well, the reason was probably the endowment effect.

What causes the Endowment Effect?

According to behavioural psychologists, the effect is cause by two main reasons: a notional sense of ownership, and an aversion for loss.

If we have even a loose and temporary sense of ownership with an item, it creates a small but significant link to our identity. No one can help feeling like Steve McQueen on test driving that muscle car. Similarly, that startup founder gets that buzz of being the next unicorn, even with that first test invoice issued from the free 7-day trial version of a billing app.

Loss aversion is a powerful instinct that has haunted us from stone age. The caveman loved that shiny smooth round rock he found by the riverside on his daily hunting trip. He can kill to guard it. We need a really large incentive to sell the first car we bought, after saving for what seemed a century, long after we stopped using it. Prospect theory shows we issue more importance to losses than gains. Because of this tendency, when making choices, we often tend to focus more on what we lose than what we gain.

Another example of this comes from B2B sales where RFP’s are a critical part. The RFP scope often hinges heavily on recreating redundant existing processes in the new platform. I often refer to it as the “new bat, old shot“ syndrome.

4 ways you can use Endowment Effect to power your sales conversions

1.Let customers co-drive your product demos

Imagine how you would feel at a test drive if the car dealer drives it for you! That’s exactly the impact created in a product demo where the prospects have to sit out a one sided presentation. There is no driver for that golden notion of ownership.

What you need is a demo sequence where the customer can take over the steering wheel while exploring your product for the first time. However you need to carefully choreograph the actions and choice paths in your demo, so the customer is only able to touch areas which have more impact and less complexity. While you jump in to “co-drive” in complex areas where prior experience is required.

For instance, a leading enterprise SaaS company introduced a minor change in their B2B demo process. At every new pitch, the prospects needed to sign-up and create their own personal demo accounts, and share it with the sales team, which was then used by the sales rep for demonstration. The sales reps also granted shared access of screens to prospects and directed their actions as they clicked and explored. The users got the feeling of being in the driver seat. Conversions went up by 28%.

2.Create your Sales Champions in the customer team

A Sales Champion is the individual or group within your client’s organisation who will advocate the benefits of your product, even when you’re not there. They will guide you through the decision making process, introduce you to key players and decision makers, and alert you if things go wrong.

The key here is to present your product as a transformational project, and give your sales champion the sense of ownership of this project. There are two ways to identify your sales champion profiles in the customer account:

They are users with the exact or relevant pain points that your product is trying to solve. For instance, in convincing a CEO for a new financial management platform, the sales champion needs to come from the finance or sales team
They have decision making power or influence it. All sales effort must be directed at the decision maker in the target account, or the people who influence the decision maker

Once the decision maker in your target account or an influencer in your customer community owns your product adoption as his personal initiative, the chances of conversion go up by manifolds. They will not just be driven by ownership, but also by a sense of not losing out on their initiative. We are all compulsively loss averse!

3.Make your customers drive the agenda for your sales process

Real magic happens when you create an environment where the prospect feels he is chasing your product, and not the other way round. A careful design and execution of your sales process can make this dream come true:-

Qualify well! Also make an effort to ensure that every lead up for demo in your pipeline is genuinely interested in your product. This means that they have a compelling need, budget and authority to close with you or your competitor. This automatically transfers the ownership of driving the sales process to the customer
Nurture sales champions in target accounts in advance. Create a community of your product enthusiasts using marketing and communication channels driving the gospel of your product. This increases the chances of your sales reps finding co-drivers in the pitch meetings, helping push the agenda and benefits with much more impact
Establish the need and expectations from your product in the customer’s mind clearly before the demo. One powerful way of doing this is to request the customer to clearly articulate what he is looking for in the upcoming demo

When the sales process is driven by the customer himself, his ownership acts as a booster for moving from consideration to commitment stage.

4. Personalise the product/trial run for the customer

The Anna Karenina principle says that “Happy customers are all alike, unhappy customers are each unhappy in their own way”. As a sales leader, you are almost always sure of what your happy customers are happy for. But when you start mapping the issues in accounts with a difficulty, the list becomes wide with customer specific reasons. An effective sales strategy needs to proactively define what each specific customer group needs to discover value, and make it a part of user experience and brand messaging.

To enable a personalised selling process at scale, you need to clearly identify target customer segments and create a product benefit mapping for each segment. Your sales team and your channel partners must be well-versed to segregate their leads as per your defined segments, and drive conversations based on the defined mapping.

When the customers see tangible effort on part of your sales team to personalise the product demo or trial to focus on their specific pain points, it gives a powerful sense of ownership in their mind. And ownership translates to better conversion.