Before finding out how the endowment effect has an impact on marketing, it is best to understand what this effect is all about. According to behavioral psychologists, the endowment effect refers to how people value their possessions. A person will value certain goods if they own them but will not put a high value on goods that they do not own. While this may sound strange, most people tend to value their own possessions compared to similar goods that they do not own. This irrationality in behavior comes from cognition bias.
Psychologists have done several experiments and studies to understand what the endowment effect is and they believe it is a form of bias that people demonstrate in their everyday life. When it comes to people, who are potential buyers, it is important to understand the endowment effect. Generally, people are irrational and subjective when they have to buy something. They do not use logic and end up valuing something higher than what it is only because they own it.
Researchers have also found that the endowment effect comes into play when people own items or goods that have sentimental value. It is due to the emotions and feelings that these goods evoke in a person that they tend to add a sizeable monetary value to them.
If you are a marketer, you should know more about hyperbolic discounting and make it an integral part of your marketing strategy.
Hyperbolic discounting is a cognitive bias, wherein people are ready to take a small reward in the present rather than a big reward in the future. For instance, if a person is asked to choose between a plate of cookies today and two plates of cookies next week, they will always opt for the former than the latter due to hyperbolic discounting.
On the other hand, if a person has to choose between a plate of cookies after one year and two plates of cookies after 1 year 1 day, they will always go for the latter. It is prudent to note here that the reward is still the same but the person’s behavior has altered. And, that is what hyperbolic discounting is – when a person perceives that they will get both rewards in the distant future, the time difference between the two rewards becomes insignificant.
In a marketing context, social proof is a concept where a business attracts more customers because of the simple reason of already having many customers. Psychologists confirm this concept through their research studies that indicate that people are more likely to purchase a product or opt for a service that others are already purchasing. Also known as the bandwagon effect, you will notice this happening in crowded places like amusement parks or even restaurants.
In fact, social proof is prominently seen when people have to make choices between a less popular alternative and a hugely popular one. You may have noticed that a restaurant that has fewer patrons will be deemed to be not very good when it comes to quality and people prefer to wait in long lines outside popular restaurants. The same is the case with the sales of popular gadgets or smartphones. The more popular it gets, the more people want it. Crowds attract crowds – that’s the phenomenon behind social proofing.
The decoy effect is, of late, becoming a viral marketing strategy that is adopted by marketers the world over to influence the purchasing decisions of consumers. Dan Ariely’s Predictably Irrational has had quite an impact on the widespread use of the decoy effect in marketing, but the point to consider here is the ease with which the human mind can be influenced using this strategy.
The decoy effect creates a cognitive bias in the minds of consumers by altering their preferences between two alternatives by introducing a third, which is an entirely irrelevant choice.
The COVID-19 pandemic has changed the way businesses all over the world function. This pandemic still continues to alter lives and has made people from all walks of life sit back and reflect on the true purpose of their existence. Mental wellness and overall well-being have taken precedence over making money and meeting deadlines. While this has become the new normal, it is also true that businesses now have to reformulate their strategies to identify their key stakes in the current, post-COVID market space to establish their foothold.
In these uncertain times, it can be challenging to predict trends as the market may not behave as you anticipate. Nonetheless, the industry trend prediction should not be neglected as it will prepare your business to cover all bases and handle even the unexpected. Businesses need to take a second look at their marketing and business strategies. These strategies will determine how your business will perform in a post-COVID world. Hence, you should know what you are doing right and where you should focus.