The Anchoring Effect in Marketing

Anchoring is a term used in psychology to describe the tendency for people to over-rely on specific information when making decisions.

Anchoring was first theorized by Amos Tversky and Daniel Kahneman. They found that giving people a “starting point” can influence their decision making. They performed an experiment to demonstrate the anchoring effect:

Subjects were asked to guess the percentage of African countries in the United Nations. They were first given a percentage; they were then asked whether or not their estimate was higher or lower than that given percentage and to make a guess as to the correct value.

• The group that was asked “Is it more than 10%?” guessed that 25% of Africa’s countries were in the UN.
• Those who were asked “Is it more than 65%?” estimated that 45% of African nations were in the UN.

This study is a perfect example of the anchoring effect. The researchers were able to influence the subjects guess simply by adjusting the “starting point” number.

Familiar Products

Once we buy a product at a particular price, we become anchored to that price. Maybe you won’t pay more than $30 for a pair of jeans or $2 for a loaf of bread, this is the effect of anchoring. We use anchor prices to evaluate future decisions for that product or product category—it’s how we gauge whether or not we are getting a fair deal. In Predictably Irrational Dan Airely describes how people who moved and immediately bought a new home tended to spend the same amount on housing as they had before…even if this meant buying a home that was much bigger or much smaller than the one they left. They were anchored to the initial price of their home.

Lesson

Because customers have purchased the product before, they have an anchor price. This anchor price is the measuring stick which they will evaluate your offering against. If your price is lower than the anchor price, then customers should be attracted to your product. If you are priced above the anchor then you will need communicate why it is more expensive in order to disassociate that product with the anchor price.

Unfamiliar Products

But what about unfamiliar or rarely purchased items where we have little or no anchors? We often accept the first price that we see because we really have no idea what it costs. Let’s say you go to the electronics store because you are thinking about buying a 3D TV. You see a 60” one you like that costs $2,500. Though you may not purchase that particular TV, that $2,500 now becomes the anchor price against which you will measure all other 3D TV’s in the future.

Lesson

Start with a high price point. Don’t get fooled into thinking that you will be able to up-sell customers after luring them in with low prices. The more effective (and profitable) strategy is to establish a high anchor price. Introduce new customers to your higher priced offerings. Once you have established a high anchor price in their minds, lower-priced options will be much more attractive.

If you enjoyed this article, you may be interested in some others from the Understanding Customer Thinking series:

• Part 1: Don’t Overwhelm with Choices
• Part 2: The Framing Effect
• Part 3: Decoy Pricing
• Part 5: Minimize Risk
• Part 6: The Placebo Effect