Anchoring: How to Shape a Customer’s Perception of Your Product
In this exclusive book extract on pricing strategies, learn the importance of first impressions when it comes to value and price
Sometimes a customer just doesn’t know what your product is worth to them. We are used to thinking of this as a problem. If someone doesn’t know the value of what you do, it feels as though they won’t be willing to pay for it.
That’s not necessarily so. We call this “unknown expected utility”, and it gives you a superb opportunity to shape the customer’s perception of what your product is worth. The primary method for doing that is called anchoring.
The technical name of the ‘first impressions’ effect (anchoring) has been seen in dozens of economic lab experiments and countless commercial settings.
In an experiment with MIT undergraduates, Dan Ariely and colleagues auctioned off some tricky-to-value items – wireless keyboards, boxes of luxury chocolates and obscure French wines. The trick was this: before the auction, they asked each person to write down the last two digits of their social security number and ask themselves ‘Would I pay this number of dollars for the item?’ So someone with the social security number 440-84-8398 was looking at an initial price tag of $98, and their fellow student with the number 232-20-3911 started instead with $11.
These price tags were not part of the auction – it was a straightforward process where the highest bidder bought the product – but they had a huge effect on the bids that the students placed. Those with high digits ended up bidding about 50% more than those with low digits.
I have repeated a version of this experiment at many conferences and talks – and even when people are aware that I’m talking about pricing psychology, and many of them can guess exactly what I’m trying to prove, it still works. This effect is so strong that even when we consciously try to adjust for it, we usually can’t.
An anchoring pricing strategy case study
Consultancy businesses can use anchoring very effectively, for two reasons. First, consulting is a very non-commoditised business: it is difficult to compare one consultant with another, so clients are unlikely to have a clear pricing assumption already in their head. Second, you are often preparing a bespoke quote for each client, so you can create a range of solutions at very different price points with complete credibility. .
So when you are asked for a quote by a client, offer at least three options:
- A high-end, everything-including-the-kitchen-sink quotation, which covers everything they could possibly want.
I’ll call this the A package, though you would probably want to choose a more expressive name such as ‘in-depth support service’ when you describe this option to your client. This might be priced, for example, at £60,000 for a project (the exact numbers will vary according to the situation, of course). You don’t expect most clients to go for this size of project, but some might – especially bigger companies for whom the value of getting it right will far outweigh the cost of your service. However, what it does is establish that the value of what you offer can be at this level or above.
- A middle-of-the-road option at, say, £19,000 – the B package.
This is the level you think most clients should go for. The service should be clearly distinguished from the high-end option, so that clients who are considering the A package have good reasons to stay with it instead of trading down to the B package. But it should still include most of the key benefits of your service so that you don’t risk losing the client to a competitor on the basis of a feature comparison. It’s important that this option is not a hollowed-out version of your service – instead, the A package should have lots of luxury extras.
- A cheap version at, say, £12,000 – the C package.
It’s OK for this one to be clearly inferior to the B package – it is meant to give people the option of spending less money but to feel that there is a good reason for them to move up to the standard B package.
Note the ratios in price: approximately 12:20:60 or 3:5:15. The numbers do not need to match these proportions exactly – a 1:2:4 ratio is also common – but these are good guidelines. The point is that the primary anchor, the A package, is significantly higher than your standard price; and that you still offer people at least two options even if the A package is too expensive for them. The C package is lower than the B package, but not too much lower. The overall effect of this structure is to set the expectation that some people are willing to pay the A price (so the product must be a high-value product) but that the real decision is between B and C, so B and C must be relatively close in price. If C is too low (say £3,000), it is more difficult for the customer to form a view on a core price band. So you should use B and C prices as an upper and lower boundary on what you want to portray as a sensible price.
Downsides of anchoring as a pricing strategy
Anchoring has a powerful effect on the sales of the product you’re focusing on, but it can have an effect on consumers’ assumptions about your overall price levels. If you have high-priced anchor products it will be difficult to convincingly present an image as a discount or good-value supplier. In any case it is difficult to make those positions profitable unless you have very high volume and strong operational efficiencies, but some companies can do it. Most smaller businesses are better off with a high-value, high-margin positioning, and for these, anchoring is very powerful.
How to apply anchoring pricing strategies
There are a lot of different ways to apply anchoring in most businesses. Here’s a process you can follow to work out how best to use it.
1. Collect data. You want to know as much as possible about the range of prices that you and your competitors charge for a given product. Maggie had the advantage of a unique product for which no benchmark existed, but for most businesses, there are competitors or at least some kind of comparable product out there already (see Chapter 1 for more about this). Even if there are no direct competitors, find the range of things you’d like to be compared to – in this example, teabags and Starbucks mochas. Then compile a list of as many examples as possible, writing down the product name, who sells it, the size or quantity, and how much they charge.
2. Order these by price level, so that you can see the range of prices charged for similar products.
3. Now consider the path a customer takes before choosing to buy your product. Do they see a range of items in your shop? Or on your website? Or do they find different options by searching the web? Is your product sitting in a shop alongside other similar products?
4. Find where in that path you can add a new product at a high price. If you are a retailer or if you sell products from your own website, you have a lot of control over this. You can place a high-priced option in front of the customer before they see your ‘standard’ product. If you have a product in someone else’s shop, you have less direct control. But you can still try to persuade the retailer to display a higher-priced, luxury version of your product alongside the standard one (show them this chapter if you like – it is in their interest too!) or even try to place your product in retailers where the default prices are already higher (Waitrose instead of Sainsbury’s).
5. Choose your anchor price to be substantially higher than your standard price. The anchor effect still works for a £5 product with a £6 anchor, but it isn’t very strong. If two prices are close together, customers are likely to compare them directly instead of changing their subconscious evaluation of the true value of the product. But if you can put a £20 anchor alongside that £5 standard product, then the true value is much more likely to be shifted.
6. If possible, try to measure consumer behaviour with and without the anchor. There are at least three variables that can change: the number of consumers who buy anything at all; the proportion who buy this type of product; and the relative share of the £5 product versus other versions (for instance, if you have a £5 and a £3 version, which sells more?). Measurement is really important as there are lots of effects which may be going on at the same time, and you want to know which ones are stronger.
The Psychology of Price: How to use price to increase demand, profit and customer satisfaction, published by Crimson Publishing is available on Amazon now.