Here is an example – the price tag on a sale item. The regular price of $260 is larger, and becomes established in our minds as the anchor price. It makes the sale price of $129.99 seem almost irresistible.
Here is another example. The watch on the left, priced at one million dollars, makes the very similar watch on the right seem like a very good deal at a paltry $10,800.
This example is taken from a restaurant menu. Up at the top we see the bold section header "Twenty", establishes it as a kind of anchor. We expect this to be the $20 section of the menu. Suddenly the prices below, all of which are less than $20, seem like relatively good deals. The anchoring effect somehow makes a $14 hamburger seem like a bargain.
But anchoring can also happen inadvertently, and with negative unintended consequences for the seller. Here are two recent examples:
Earlier in the year I read a great review of a new model of water-resistant earbud headphones. The price, at $150, seemed a little high but if the sound was good and they would really survive the exposure to water that had ruined countless other sets they might be worth it. I made a mental note to watch for them to be discounted.
The following weekend a local stereo advertised them at just $75. With the anchor price of $150 firmly established this seemed like a great deal, and I was ready to buy. Unfortunately I couldn't get to the store that weekend and missed out on the sale.
I did start following that model on eBay though. If an item is discounted that much it will typically show up on eBay at similar prices.
It hasn't. There are lots of new listings for that same model almost every day, but they all seem to close between $120-$130.
If my anchor was still $150 this would seem like a pretty good deal – about 20% off. The problem is that ever since that sale was run my anchor is now the $75 sale price that I missed. When I look at the eBay prices I'm not thinking about how much lower they are than the $150 retail price, I'm thinking about how much more they cost than the $75 sale price.
Even though countless eBay listings prove that $120-$150 is the fair market value for those headphones I'm fixated on the $75 sale price. For now that means one less pair of headphones sold.
Could it have been avoided? It would be hard. The seller could have been more vague in the advertisement – promising huge savings on headphones in general but not mentioning specific models.
A smaller discount might have worked too. When I was focussed on $150 a discount to $100-$125 might have been enough to motivate me without the adverse effect of establishing a new $75 anchor so far below the average selling price.
Overall it's probably best to save such aggressive discounting to help move end-of-life products than to introduce new ones.
A few years ago a friend in the website business quoted an acquaintance on building a custom e-commerce website for their flower shop. It was a very aggressive quote (the really got him at the right time) but they were doing a lot of research and continued looking at other options.
When they were ready to proceed a few years had gone by and prices had gone up. In no way was this a gouge – times had changed and the new price represents a fair cost for what was being delivered.
But the original price remained anchored in the mind of the customer. They didn't want to pay the new price, they wanted to pay the old price. It took them a few years just to commit to the old lower price, now they had to start coming to terms with a new higher price.
Could that have been avoided? Possibly. If the quote hadn't specified a "good until" date something to that effect might help in the future.
So would following up – maybe all sales that are in the pipeline should get an email in advance of price changes encouraging them to act quickly. This would do two things – by invoking scarcity and the fear of loss it would likely get some customers off the fence and close sales. It would also be a reminder to those not yet ready to move forward that they shouldn't get too attached to their old quotes – that pricing is always changing.
Beyond Cost Plus is sponsored by FloristWare – the most popular floral POS software system. FloristWare saves you time and money while increasing sales and profits.