A key principle to understand in behavioural science is no decision is ever made in isolation. Every decision people make, be it consciously or subconsciously, all have a reference point that we use to weigh the decision against. This reference is usually within the given context, such as value being determined by surrounding similar products of different prices. We call these reference points ‘anchors’, and they determine how the rest of our decision making process will go.
A simple example is negotiations: if you start with a high price, the rest of the negotiations will ensue in relation to that high price, and ultimately end up higher than if you were to have started with a low price.
An anchor can be completely irrelevant and still influence decisions. Amos Tversky and Daniel Kahneman, two of the highest regarded minds in behavioural economics, conducted a study where they asked participants what percentage of the United Nations comprised African countries. Before answering, the participants watched a video of a roulette wheel spinning that landed on either 10 or 65. For those who saw it land on 10, their estimates were lower, averaging about 25%. Whereas those who saw the roulette wheel land on 65 guessed higher with answers averaging around 45%. Despite roulette wheels having nothing to do with the UN, the initial anchor set by the video determined where the participants anchored their decision around.
The anchoring effect is utilised in multiple areas across marketing. One common application of price anchoring is displaying three variations of the same product, each with a different price. One example of this is coffee sizes. If you have a shop serving coffee, they are usually in small, medium and large quantities. When placed side by side, each size’s price is then anchored to the two corresponding sizes. Imagine if the small was £2.50, and the medium was £3, most customers would opt for the £2.50 option as best value for money. However, by introducing a large size at £4.50, the price anchor changes and makes the medium size the best option. The trick here is the large size isn’t meant to be the desirable option, but it shifts price perception and makes the medium size look like the best option.
Every purchasing decision is made relatively, which Rolls-Royce (RR) perfectly capitalises on when it comes to selling their cars. The average price of a new Rolls-Royce, with all the personalisation you’d want, nears half a million pounds. When marketing at other car shows, RR understandably found they were the product causing the high end anchor and making people buy other cars. Cleverly, RR amended this, not by reducing their price, but by changing where they were advertised. Instead of car shows, Rolls-Royce took their motors to private aircraft and yacht shows. All of a sudden, when the price anchor is well into the millions, 500 grand on a car seemed like an easy purchase – and it worked.
Anchoring’s power comes from the fact it changes perceived value without adjusting the cost at all. Take the coffee example, there isn’t a downside to adding a more expensive option, worse case scenario people buy it and there’s more income. However, the more expensive option increases the perceived value of the previous product, even though that price hasn’t changed. There is a risk when a product isn’t selling as anticipated to cut its cost thinking that will increase sales. But, depending on the product, decreasing its price alters the perception that it is cheap or unreliable. A great example of this in action is when Dr Scholls originally launched. They claimed all these cutting edge benefits from their insoles, for a price of less than $20. However, it wasn’t until they increased their price that sales started to grow. Because of the initial cost, people believed they weren’t paying enough for what claims to be such a good product, so consumers believed it wasn’t that great of a product. Just as perception can change price, price can change perception.
Sometimes, your product’s anchor point might not even be from your range, it could be from your competitors. If someone has the option of two competing shampoos, and your business hits the shelves as the premium option, you could actually unknowingly be increasing the sales of your competition, because you’ve driven up the anchor point.
Like a lot of behavioural marketing, incorporating the anchoring effect correctly is a proven and simple action that can greatly improve sales by changing the perception of your prices.