Behavioural Principles of Anchoring

Have you ever heard of “anchoring” in business before?

“Anchoring” refers to the practice of using one high priced product or service option (an anchor) to make everything else that you sell seem cheaper by comparison.

A good example of how this works in business is when a business discounts a product and a buyer sees it as a bargain compared to the original price.

OK, this is pretty straight forward; why should I read further?  Well, if your business is prone to discounting products and/or services, it is important to understand what your customers are in fact using as their “anchor” point when they are deciding whether or not to buy your product/service.

By this I mean, by way of example, if your customer’s using a competitor’s price as their anchor how do you know this and then counter this anchor price?

Perceived product differentiation is one way of “anchoring” your products/services from your competitors.  For example, your competitor sells a torch for $25 which is the “anchor” price for your customer.  You sell the same torch for $24.99 however, you market as selling safety for your family when there is a blackout or when a wife or daughter is walking to her car late at night.  Most people will place a high value on family safety so, although they are paying, in effect, the same price they perceive they are getting more for their money and feel more satisfied; ie, because the customer perceives they received more than just your Torch, there is a perception of discount.

Another example of this perceived anchoring is a fast-food takeaway providing additional benefits when customers purchase their takeaways.  Examples of how this might work are:-

  • have the current day’s newspaper available while people wait;
  • have free Wi-Fi for customers while they wait; or
  • making the purchase an enjoyable experience.

Anchoring begs the question “can a business survive without discounting”.  If you customer is not worried about price how do you frame your price?  What happens when you set a low entry price and then try to increase it in time – What is the anchor price – the higher or lower price?

If the anchor price is set higher and then you discount, it looks like the customer is getting value.

It is one of the reasons I have suggested to clients who believe they cannot survive without discounting to determine the real price they want to charge then set their non-discounted price at a margin above this price.  For example, the real price the business wants for a torch is $25, so the anchor price is set (ie, before discount) at $30.  Then, the business can offer a $5 discount to $25.

If you require assistance with pricing of your products and/or services call me today to get your pricing right.

David Balwin Tax Accounting CFO Business Advice