Price Anchoring: The Unfair Advantage
In my previous post, I discussed how price promotions and discounts actually hurt both your brand and your bottom line and why you should avoid them at all costs. Following the post, I received many questions about what can a business do instead of claiming that customers only want low prices.
What if I told you that you can make any price appear cheaper? Any price?
How? Well, it has everything to do with a common cognitive bias that each of us already uses on a daily basis in order to make decisions quickly and easily. These human biases affect and influence our behavior in relation to how we buy, invest and judge people, brands, and organizations. They are a critical part of understanding behavioral economics and provide practical ways in which you can favorably influence how your customer perceives the price.
This is why price anchoring is the single most effective/influential cognitive bias, which you’re probably not using to your business and brand’s best advantage.
The Science Behind Cognitive Bias
When it comes to the effect that the anchoring bias has on a consumer’s perception of price, there aren’t any magic tricks or smoke and mirrors involved. No magicians or online gurus peddling their race-to-the-bottom strategies and discount dash tactics as the next BIGGEST ONLINE SALES HACK…ever. Nope. If that’s what you’d like on your business horizon, I’m afraid that ship has sailed…IN FACT, here’s exactly why discount strategies are damaging your brand and killing sales.
Since as you appreciate facts as much as I do, the expansive amount of scientific research and academic literature on cognitive biases that’s been created over the past 60 years, is really going to get you going. The seminal study of cognitive biases and heuristics was led by behavioral economists Daniel Kahneman and Amos Tversky in the early 1970’s which opened the floodgates of research and discourse on human judgment and decision-making in social psychology, cognitive science, and behavioral economics.
Since research started nearly six decades ago, the list of cognitive biases continues to evolve as does our understanding of the psychology of judgment and decision making.
Daniel Kahneman, author of the revolutionary study on cognitive biases was awarded the 2002 Nobel Memorial Prize in Economic Sciences for his work in the field of behavioral economics.
Price Anchoring Decoded
So what is price anchoring exactly? Well, as a cognitive bias, anchoring is defined as the human tendency to rely too heavily on the first piece of information offered when making a decision. In this case, the first piece of information is referred to as the anchor. Think of it as a mental shortcut that our brain uses to make a judgment about something. These mental shortcuts are called heuristics.
The brain deals with a torrential onslaught of information throughout the day. Some of this information we think consciously about and take our time to think things through, while other decisions need to be made quickly and on the fly. Think about it, if we had to conscientiously deliberate over every single decision that our day necessitates, we wouldn’t get much done. This is exactly why our brain seeks out shortcuts such as heuristics and biases to help us make decisions.
Our minds are associative by nature which means that the order in which we receive information dictates the course of judgments and perceptions. When it comes to pricing, the same holds true. The first price that a customer engages with is called the anchor price. The anchor price will influence how reasonable or unreasonable the follow-up offer will be perceived.
They say that the best way to sell a $2,000 watch is to put it next to a $10 000 watch. This is a clear example of price anchoring at play. If the first price we’re exposed to is far too high, it can make the slightly less-than-reasonable price seem entirely reasonable in contrast.
All of a sudden that $2,000 price tag appears lower, doesn’t it?
Price anchors make your price appear lower in comparison.
By understanding cognitive biases, you gain invaluable insight into how your customer thinks and arrives at a judgment. This information provides an invaluable advantage when creating a pricing or marketing strategy that is focussed around the customer.
Price Anchoring is Especially Important in e-Commerce
Using price anchors to make your price appear lower in comparison is a powerful tactic, especially in the highly competitive world of e-Commerce. Have you ever thought about the customer journey in an online store versus a brick and mortar store?
In a physical retail store, everything from product placement, music, lighting, and layout are designed to activate the customer’s buying intentions. You can pick up the product, feel the quality and use your physical senses to help you decide whether you want to make the purchase. In a brick and mortar store, there are a bunch of buying stimulants that customers are faced with, all of which aim to incite a purchase.
One of the biggest issues with online stores is that you cannot touch, smell or feel anything. This means that people will rely heavily on other perceptual heuristics to form their opinion on products, such as price and the visual context of price. While this might at first appear like the biggest obstruction that an online store has to deal with, it’s actually a good thing.
Why? Because we can use psychological heuristics to help people perceive our prices as more attractive through anchoring. So in order to make our price appear lower, all we need to do is to present higher numbers before our price or to place the price we want to promote to the right side of a higher price. If you’re not using price anchoring as part of your pricing strategy then you’re probably selling fewer higher-priced offers and leaving big money on the table.
Cumulative data and research emerging from e-Commerce markets worldwide identify price as the key factor that affects the online purchasing decision of global digital shoppers. Prices are the first thing that an online shopper directly detects. Since the price is the first piece of information that your customer is exposed to on your online store, you can see how the use of price anchoring can be a powerful tool that primes them to make a purchase.
When it comes to effective pricing- always be anchoring.
And I’m going to show you how to do exactly that. Below are six strategies you can use to make your price appear lower without actually lowering it.
Price Anchoring Tactics to Make Your Price Appear Lower
1. Use list prices
When you use your list price, your current price will seem lower in comparison. Your list price acts as your anchor. A 2001 study by Galinsky and Mussweiler, revealed that sellers get more money by starting negotiations with a high initial offer as their price anchor. The higher the anchor, the higher the final price.
So start with exposing your customer to a high initial price first. Your list price is the perfect jumping-off point. Use it to anchor your customer’s perception of value and nudge them into viewing your current price as lower in comparison.
Secondly, use a precise value. A 2008 study conducted by Janiszewski and Uy required participants to estimate the actual price of a plasma TV based on the suggested retail price. Either $4,998, $5,000 or $5,012. They discovered that when participants were exposed to precise values they estimated the plasma TV’s actual price closer to that range. In contrast, when the suggested price was rounded, participants estimated the actual price to be much lower. When the anchor is precise in value, people adjust their estimate past fewer units.
2. Expose people to high incidental prices
Our brains are wired to seek out anchors, so could exposure to high prices (even for unrelated items or services) skew us toward the higher end of the price spectrum? A 2004 study conducted by Nunes and Boatwright explored this possibility. To test this notion they set up shop on a boardwalk in West Palm Beach selling music CDs. Every half hour, the adjacent vendor alternated the price of a sweatshirt on display from $10 to $80. The researchers observed that when the price of the sweatshirt was displayed as $80, people paid higher prices for the CDs. The sweatshirt’s price had anchored them toward the respective ends of the price spectrum.
This shows us that exposing people to higher “incidental” prices or even high prices of unrelated products can anchor them toward the higher end of the price spectrum.
You can deploy this tactic easily if you have an online store by exposing your customer to other items on offer but be sure that these items have higher price points.
3. Expose people to any high number
By now you understand that people share a subconscious tendency to assimilate towards an anchor point. Anchoring works for any number, regardless if that number is a price or not. A 2002 study conducted by Adaval and Monroe put this statement to the test. Participants of the study were subliminally exposed to a high number before they were shown a price. The researchers noted that exposure to the high number caused the participants to perceive the subsequent price to be lower. Anchoring occurs subconsciously, this means that customers don’t need to think about a numerical anchor.
This striking example shows that even if your customers don’t consciously notice your numerical anchor, they merely need to be exposed to it. A great way to do this on your online store is to display the number of customers you have near your price, you could also mention the amount sold of that item or how many people have liked/shared it. Make sure the number you use to anchor your customer is high enough to weigh them towards the higher end of the price spectrum.
4. Raise the price of your previous product version
You’re launching a brand new and more expensive product. Exciting! But how should you price your old product? Most people make the mistake of lowering the price of their previous product to gradually phase it out of the market but they’re missing a ripe opportunity to increase the perceived value of the customer’s reference price.
By increasing the price, you raise the customers’ reference price and enhance the perceived value of your new product. In contrast, if you lower the price of your previous product, you reinforce a lower reference price which can make your new product appear more expensive.
5. Sort prices from high to low
By sorting prices from high to low you can orientate customers to choose a more expensive option. When consumers evaluate a list of items with descending values, they use the first prices that they are exposed to when formulating a reference price. When you sort prices from high to low your customer is anchored to the most expensive price first. When they evaluate the other options, they automatically seem like a better deal in comparison.
6. Position prices to the right of large quantities
When it comes to the layout of your online store make sure to position prices to the right of large quantities. People conceptualize numbers on an imaginary horizontal line, with numbers growing in magnitude from left to right. Think of it as a mental ruler. Our brains associate physical magnitude with a numerical magnitude which means that you can prime a higher magnitude by positioning the price to the right of large quantities.
Why Price Anchoring Is Good For You
Now that we’ve covered six practical ways you can use anchors to position your price effectively, what benefits can you expect?
Create an effective pricing strategy
You’re now able to design a deliberate and effective pricing strategy based on an understanding of the psychology that drives your customer’s decision-making process. This is a competitive advantage that you can use to set a price that will be attractive to your customers and motivate them to buy.
Make it easier for your customer to recognize the value
By placing more expensive items or premium products near standard options or older versions, you make it easier for your customer to recognize the value.
Avoid devaluing your brand
Price anchors help shape the way your customer perceives value and how they engage with your price. We know that the higher the initial offer/ anchor, the higher the final price. This means there’s no need to engage in devastating discount strategies that damage your brand’s value in the long run.
These benefits compound to deliver the very thing all e-Commerce business owners are after- increased sales volume. When you have a deliberate and effective price strategy that uses price anchoring to its advantage, you’re able to set a price that looks attractive to your customers, therefore motivating them to buy. You guide them further along their purchasing decision by positioning your price through anchoring so that it is easy for your customer to recognize the value of the offer. Your aim here is to create a scenario that maximizes the perceived value of the anchor price is that the less expensive options are viewed as a bargain in comparison. Each part of the journey you undertake with your customer coaxes them towards making a final purchase.
Understanding the motivations and idiosyncrasies which influence your customers’ decision-making processes provides e-Commerce owners and marketers with a distinct competitive advantage. By applying various strategies from the behavioral sciences, you can utilize pricing as both a marketing tactic and conversion rate optimizer which boosts sales volume and strengthens your brand.
Nice to meet you
Digital marketing strategist, wanderer, insighter, foodie, a mom. I’m also the marketing psychology geek behind Insightout Digital.
I have an MBA in consumer behavior and have been helping businesses big and small and teaching MBA students since 2004. I love helping entrepreneurs and eComm businesses just like you grow exponentially using systematic methods rooted in real human psychology and behavioral economics research.