The Endowment Effect

I always used to see people practice “Flagship Selling”.  You know, where no matter who the customer is, you offer the best you have to offer and start working down from there.  I always thought this was a flawed practice, and in the extreme, I still think it is.  You don’t start everyone who walks into your clothing store at the True Religion and Seven for all Mankind rack (I’m married and have 2 daughters so go easy on me for knowing about designer jeans).

However, the logic behind this strategy is not flawed if implemented correctly.

OK, again, I am going to try hard not to write a book report, but in “The Paradox of Choice: Why More is Less” by Schwartz he exposes a great fact about human psychology.  People hate to lose MORE than they like to win.  That is if you took an emotional baseline and assigned some values to it, a person who loses $100 would move further in the negative direction than he would move in the positive direction if he won $100.

So what does that mean, really?  In isolation, not much.  You have to combine that knowledge with something else.  Frame of reference.

One more piece from Schwartz’s book (everyone should read it actually, I’m on the 4th time, and its awesome).  If you look at Olympic medalists, Bronze medal winners are happier on the whole than silver medal winners.  Odd huh?  Why?  Frame of reference.  Silver medalists think of how close they were to getting the Gold, and Bronze medalists think of how close they were to missing the podium altogether.  They both see a near miss, but the silver medalist sees that miss as a loss and the bronze medalist sees it as a gain.

So we know that people hate to lose, and we know that frame of reference can determine whether someone sees an event as a loss or a gain.  We now have the tools we need to upsell a product.

Putting it together. . .

If you read the previous post, you know to listen and clarify what the customer needs before trying to offer any solution.  This is where traditional Flagship Selling falls short, but where we can improve on it.

So we have all the knowledge to put together a proposal and this is what we usually do.

We assemble a base proposal around those minimum requirements.  We present that proposal and ask the customer if they would like to upgrade to this and that feature for X amount of dollars.  Danger Will Robinson!  Reverse fields.

Assemble two proposals.  One that incorporates the base needs and one that improves upon them.  Your first pitch is the upgraded system or product.  You propose the product on the higher end of their needs and expectations.  Then you frame that against the base proposal.

“Mr Jones, the system I propose has a 7.1 receiver with two zones and it does HDMI upconversion so you get 1080p from every connected source, it has 5  aluminum cone speakers, it has Blu-Ray Player with Netflix built in, and it has a universal remote all programmed and ready to go.  It is $6000 installed.

Based on what we talked about, I can also put together a system for about $4000 that meets your needs.  That system is very similar.  It is a single zone receiver, so you would lose the ability to listen to different sources on your patio and in your family room.  It doesn’t have HDMI upconversion, so not all of your sources would be in 1080p.  The speakers are polypropylene cones, which lose a little detail in the high end, and the Blu Ray doesn’t have Netflix on board, so you would still need to go to the mailbox for all of your movies.  You would also be using multiple remotes to get everything turned on and running.”

Which system seems like the one that will best fit your needs?”

Because loss aversion is such an intrinsic human tendency, you have framed this to make the higher end sale.  The customer still makes the choice, and in fact they will most likely be much happier with the upgraded system.  It’s a win win.

When you start with one thing, and list all the features, people take mental ownership.  It’s called the Endowment Effect (Schwartz again, you really should read it!).  They mentally own all the things you put in their hands.  Giving them back is like losing them.  This is why every car on a car lot has power windows and seats, etc.  Once they drive it, the amount they save by giving up the options is less satisfying than the loss they feel in giving them up (they never really owned them anyway but that is neither here nor there).

You may still get one or two folks that say they want the lower end system, and there is one last way to try and change their mind.

It’s called the “Take Away”, and it will be the next post.

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