The endowment effect: The sales bias costing you control and revenue

What's the endowment effect?

"They're not making any progress. I have to get them going again.

My client was worried. He had a big prospect. Who had given every indication that the project was going to be signed. But he wasn't sure.

"But I suppose you have other prospects in the pipeline."

His hesitation told me everything... He was falling victim to the endowment effect.

The endowment effect is a psychological phenomenon. Put simply, we humans have a natural tendency to increase the value of something simply because we have it. Strange as it may seem to people who think we are rational, the mere fact that we have something in our possession affects the value we attribute to it. And we tend to increase the value of that possession. We are not rational.

In complicated terms:

The endowment effect means that the highest price people are willing to pay for something they don't own is generally lower than the lowest price they would be willing to sell the item for if they did own it.

Scientists measured this in a very simple experiment. They took students (have you noticed that it's always students who validate the experiments of sociologists and other scientists?) and assigned them a role: buyer or seller. Then they gave the sellers a harmless object with the task of selling it to the buyer.

Well, the mere fact of having received the mug meant that the seller placed a much higher value on it than the other student estimated. You can read more about this bias here or here.

Endowment effect in sales?

That's a very good question. Two words: sales pipeline. We're not being realistic when we look at our pipeline. Because a prospect is in our pipeline, we assign too high a value to its probability of converting.

A concrete example? At the start of a prospecting session, if you assume that you don't have a deal in hand and you find yourself with, say, 3 prospects in R1, a natural feeling is to say that things are going well.

But sales is binary, even pipelines are weighted. It's a yes. Or a no. You don't get 75% of a prospect. We have 0% or 100%. And as they are only prospects, they are basically still 0% confirmed. In very real terms, nothing has changed.

However, as was the case with my client this morning, we often tend to exaggerate the value of these 3 leads.

What is the impact of this effect?

There are two effects that I often notice:

1- Firstly, we are deluding ourselves. Because we have prospects, we have a totally exaggerated sense of security. And when we review the pipeline, we find opportunities that fundamentally don't belong in it. This has a serious impact on an organisation that forecasts its revenues and even recruitment on the basis of a pipe that is completely unrealistic.

But there is an even greater risk:

2- We lose control. We become dependent on these opportunities turning into sales. When we interact with our prospects, we depend on them. Our prospects are not idiots and they feel this dependence through our gestures, semantics, reminders, etc... As we know, the one who controls a relationship is the one who has the least to gain from it. This is known as the"Principle of the Least Interest".

This principle is well known in love games and human relationships. And it applies perfectly to sales.

How to combat the endowment effect in sales. Two things:

1- It's as simple to say as it is complicated to put into practice, but ignoring everything in our pipe helps to keep an urgency within us. Detach ourselves entirely from what's there. Once again, selling is totally binary, 0% or 100%. To put a probability between the two is, to a certain extent, absurd. Or, more to the point, it encourages us to fall into this bias.

2- Pick up the phone or use any other prospecting method you've established to acquire new prospects. The more prospects you have, the more confident you are, the more in control you are. And our posture and attitude towards our prospects are affected.

Other impacts of the endowment effect.

There is another impact. The other is loss aversion. We don't like to lose something we have acquired, even if we haven't really acquired it in the case of a prospect. Even if we haven't really acquired it in the case of a prospect. This is why, when reviewing pipes, sales people often find it difficult to declare an opportunity lost. They'll come up with all sorts of reasons why they think the prospect will sign...

This is also why many SaaS products offer Freemium solutions. They offer it for free, for a limited time, to facilitate the purchasing process. Because we don't like losing access to a product.

In politics, this psychological bias was heavily used during the Brexit campaign. The slogan:

"Take back control" was a subtle way of telling British voters "You've lost control". People don't like to lose anything. It's the European Union's fault. They did some research when developing this slogan. They were thinking of using "Take control". Emotionally and electorally much less powerful than "Take back control".

Result: Britain left the European Union...

Whether it's a good or bad thing for Britain is up to your own perception. You may or may not put value on macro-economic facts (for example, the exchange rate GBP / EUR as seen in screenshot below). People will still argue about it for years to come.

But what matters is the wording of the campaign. That's what tipped the balance.

So how do you avoid falling into this endowment effect bias (which, incidentally, is also noticeable in primates, see the article mentioned above) and thereby risking losing control in front of your prospects?