All you need to know about the Price Anchoring Effect!
Don’t we all just love those limited-time deals on e-commerce websites? The discounts and slashed prices make purchasing commodities much more affordable and satisfying.
But little do we know that the sellers are just pulling off one of the oldest and most rewarding pricing strategies, called Price Anchoring.
In this article, we will discuss in depth what Price Anchoring is, how sellers can make profits while cutting down on the prices, and how the pricing strategy affects customers.
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What is Price Anchoring?
When making decisions, humans tend to depend mainly on a single piece of information. When deciding how much to spend for something, we frequently base our decision on the most readily available prices. To put it simply, we utilize pricing as information.
In reality, the cost of a commodity or service is never too high or too low if it is the only option available. Only if there is at least a second alternative to generate comparison is it called cheap or expensive.
Price anchoring is a pricing approach that takes advantage of customers’ natural propensity to depend mainly on initial information to steer subsequent decisions. Many firms may establish a perceptible initial price for a product but point out that it is now being sold at a discount in the context of pricing.
The first price (anchor price) mentioned will influence how future costs are perceived. If we begin with $200, $100 will appear cheap, while $1000 will seem expensive. However, if we start with $10, $100 will appear exorbitant.
The initial price mentioned may serve as the anchoring price perception. It can also enter the buyer’s consciousness, where prior experience may have set the anchor.
Price Anchoring Effect and Cognitive Biases
The “anchoring bias” is a natural tendency, where we use the first number we encounter as a standard for judgment in negotiations, purchases, or decisions.
This initial knowledge, or anchor, offers a frame of reference around which decision-makers base their conclusions.
When we make plans or estimate something, we interpret recent information through the lens of our anchor rather than perceiving it objectively. This can cloud our judgment and keep us from adjusting our plans or forecasts as frequently as we should.
In case you are interested in learning more about pricing and psychology, here is a descriptive explanation of consumer biases.
Individual effects
When we become fixated on a single figure or plan of action, we filter all incoming information through the framework we created in our heads, distorting our view. Because of this, we are hesitant to modify our plans significantly, even if the situation requires it.
Structural effects
Anchoring bias is exceedingly common and is regarded as the source of many other cognitive biases, including the planning fallacy and the spotlight effect.
Implementing Price Anchoring and its strategies
The simplest and most effective way to execute price anchoring is to develop a tiered pricing plan (whether you’re in software or not), with different versions of a core product priced differently. This automatically incorporates your anchor prices and benefits you from the multi-price thinking.
Display the costs of your competitors on your pricing page. This provides a frame of reference for your clients to evaluate your offering, but it also risks attracting other possibilities for them to pick from.
Price anchoring can function in two ways for businesses with various product offerings.
High anchor Pricing
The concept is to price a much higher premium product than the one you want your clients to buy to attract traffic to the latter.
Low anchor Pricing
The aim is to price your goods slightly higher than a lot more basic products so that clients feel like they are getting considerably more for only spending somewhat more.
Here are some Price Anchoring Strategies for your company products:
- Prices at retail.
- Always display the retail price of the goods on the product page. Cross it out and place your price beside it. Specify a price range if your product, such as a handcrafted sculpture, has a different selling price.
- Average Service Cost.
- If you are offering a service, you can use the same strategy described above on your price page but instead show the average cost for the service.
- Comparison of Competitive Prices.
- You can also present your competitors' prices for comparison, but make sure that 1) your pricing is lower and 2) you emphasize the merits of your product or service so that the consumer is not only concerned with the price.
- Compare Package Prices
- Create a price comparison for your commodities or services. For example, create a package that covers your service's features and benefits. Then, on your pricing page, place this ideal package in the middle. To the left of it, construct a slightly cheaper package that lacks the most valuable elements. Finally, to the right of it, construct a considerably more expensive package with only a few new features.
Price Anchoring: Advantages and Disadvantages
How Anchor Prices Increase Sales
Making decisions through suggestions
Humans are inherently irrational creatures. Driving people to a specific tier or product using the bandwagon effect is important because it helps buyers establish a frame of reference. Furthermore, the proposal allows customers to make a straightforward yes or no decision about paying that anchor price when combined with the anchor price. Most of the time, they will say yes since it is the simplest method to reduce the pain that the substance is alleviating and the discomfort of decision-making. Bringing the price closer to their ‘willingness to pay’ pricing makes buying easier.
People like to evade extremes.
In theory, people embrace risks and extremes, but in practice, most of us prefer to stick to the norm and avoid going to extremes.
This type of behavior is very relevant to price anchoring. A higher and lower tier should surround the optimum selection. The upper and lower tiers on your pricing page effectively anchor prices, directing users to the middle tier. Of course, smaller consumers will gravitate toward the lower tiers, and larger customers will gravitate toward the higher tiers, but informing prospects that you’ve covered the entire spectrum directs most people directly into your target tier.
Price estimation
You can increase your sales with this strategy.
For example, you may charge $100 per month for the premium tier that offers unlimited live customer support and $40 per month for the business tier that provides 30 hours of live customer support.
Most users will want something other than the unlimited option and choose the business tier instead.
They’ll sign up thinking they’ve just saved $60, while you’ll be pleased that they purchased your target product.
Alternatively, assume your organization has a basic tier with only a few features and a second tier that is slightly more expensive but provides a plethora of additional services. Customers will flock to your second tier since it represents a terrific deal for only a few dollars more. Price anchoring, in essence, allows you to set both a floor and a ceiling for your prices to steer customers to the product you want them to buy.
How to avoid the cons of Price Anchoring
This price plan would be unwise if the clients already know the product and its worth. They know what to expect, and the most you can do is charge a higher fee. In such circumstances, the higher price would be associated with more excellent quality, but the margin for error will be smaller than it would be with anchor pricing. Another situation in which you should avoid this pricing strategy is when dealing with intelligent customers. Such clients conduct extensive research before purchasing to understand how much the thing is worth. They are, in other words, resistant to anchor prices.
Avoid offering service fees over the phone or by email until you have all the job information. There are multiple variable factors.
You could quote the price of replacing one machine but have to replace an entire HVAC unit or septic system.
What if the problem is with old equipment or materials that require much more time to repair?
It is possible that the customer does not fully express the problem over the phone, and the problem is entirely different once you arrive on the job.
To prevent such risks, you can advocate service calls to gauge the extent of the job. That way, the customer knows you’ll charge them a predetermined price to diagnose the problem, and you’ll be able to give them an accurate estimate once you’ve seen the problem firsthand.
FAQs
1. What is an example of anchoring?
A car salesperson displays a buyer a pricey car, anchoring the consumer’s idea of pricing at the high end. Then they show them mid-range vehicles that appear to be so much cheaper than the expensive car that buyers frequently choose to buy.
2. What is an anchoring strategy?
Anchoring focuses primarily on the original price as a reference point during the negotiating process.
The opening or initial offer is commonly viewed as an anchoring point in the context of a transaction.
3. What does anchoring mean in marketing?
The anchoring effect is achieved by saying a lower price first, followed by a higher price.
Customers will regard the higher price as being closer to the original, lower price than the other prices presented.
