Key takeaways
- Price anchoring is a business strategy that sets a price “anchor” as a reference point for consumers to make prices seem more attractive.
- Anchor pricing is one of many modern marketing tactics that take advantage of human psychology.
- Humans prefer a reference point to make decisions; by giving consumers something to build their frame of reference with, businesses can influence their buying decisions.
- Businesses should be careful how they implement price anchoring.
- Often used in tandem with other strategies such as decoy pricing, comparative pricing, and bundle pricing.
Regardless of what product you sell, deciding on a selling price is crucial. After all, the right price can make or break a sale. If you set your prices too low, you risk leaving money on the table, but if you set them too high, you risk scaring off potential customers. Thankfully, there are some tricks of the trade that many retailers use to give themselves an edge.
One of those tricks is price anchoring, one of many tactics that capitalize on human psychology. Today, we’ll discuss price anchoring, how it works, and its role in modern business.
What is price anchoring?
Price anchoring is a marketing technique that businesses use to drive sales and influence customer decision-making. It does this by providing customers with a price point (“anchor”) that they can reference when making a purchase decision.
The technique itself is relatively simple. You’ve almost certainly seen an example recently and probably never even realized it. Think of the last time you were in a store and saw a heavily discounted item. You see a big sale sign with the original price prominently showcased above with a slash through it. It turns out that’s technically price anchoring! The higher, undiscounted price is the “anchor.”
The lower price seems like a good deal when you compare the two side-by-side. Even if the product was never intended to be sold at the original price. That’s what price anchoring seeks to take advantage of– and studies indicate it works. Businesses use this technique regularly in retail, real estate, luxury products, and especially ecommerce.
What is the price anchoring effect?
It may seem strange that we mentioned psychology above, but it’s actually part of a growing trend. Understanding how consumers (your potential customers!) think is a crucial component of effective marketing, and it falls squarely within the purview of psychology.
It’s important to note that “cheap” and “expensive” are all relative. For example, if a vital tool costs $1,000, it’s still cheap if the next best option is $5,000. Smartphones can provide a more relatable answer.
Even within their different SKUs (iPhone 15, Galaxy S24, etc.), there are variations. They might have different storage or connectivity capabilities or even processors—like Samsung’s Exynos variants. Regardless, consumers typically buy whatever they think is the best value. But best value according to what?
Generally, they look at other products adjacent to the one they’re interested in. So whatever phone they select is likely one of many. Let’s say that a full-feature phone costs $1000, and there’s another $500 version of that phone with 80% of the features.
Most consumers will purchase the $500 model. Because in their mind, if they purchase the $1000 model, they’re paying double the price for only 20% more features. By comparison, paying $500 for 80% of those features is a really good deal! Or at least, that’s what they’ll think– and that’s the price anchoring effect in action.
Even if consumers don’t sit down to figure out the exact numbers, they almost certainly follow a similar thought process. The human mind needs a frame of reference to analyze something properly. You can steer them towards a specific option by providing a reference point. That’s the fundamental goal of anchor pricing.
Tips for effective price anchoring
While price anchoring is effective, it’s not foolproof. Should you choose to implement it as part of your overall pricing strategy, here are some things to remember:
- Start with a higher anchor price—If you intend to get the most out of price anchoring, choose the right anchor price. While it may be tempting to immediately price something at your desired markup, charging a bit more will make your price anchor much more attractive to the consumer.
- Ensure your anchor price is realistic—Your anchor price shouldn’t be exorbitant. Instead, it should be relatively in line with your competitors’. Customers won’t see as much value in the anchor price if they perceive it as overpriced.
- Present your price anchor proudly—Next, ensure the price difference is noticeable. Most ecommerce sites, for example, use strikethroughs. It’s obvious, simple, and tells potential customers exactly what’s going on– and what sort of deal they’re getting.
- Create a sense of urgency—This is pretty simple to implement, as it can be as easy as including “while supplies last.” This takes advantage of another psychological phenomenon, fear of missing out (FOMO).
Common pitfalls to avoid
When implementing price anchoring, there are some things you should steer clear of. First and foremost, it’s essential that your price anchoring doesn’t seem manipulative. While it’s true that good marketing does aim to manipulate consumers to a certain degree, there’s a fine line between right and wrong. Trust is an important part of doing business– if customers don’t trust your word, they won’t buy from you.
It’s also crucial that price anchoring makes sense for the product. Some products exist in a vacuum; sometimes, the strategy simply doesn’t make sense.
Lastly, try to avoid overusing price anchoring. While an effective strategy, it often relies on a sense of urgency and scarcity. If you overuse price anchoring, you may find it will have the opposite effect.
Complementary strategies
Price anchoring is just one of many relatively new business strategies that stems from human psychology. Many of them operate similarly to price anchoring and, as a result, have complementary effects. Here’s a short list of a few you should consider using; whether on their own or alongside price anchoring.
Decoy pricing
This concept refers to when a business presents an inferior option to drive sales to the target. Returning to the phone example above, let’s say there’s a third option: $400 for a phone with only 40% of the features. Most consumers will likely view the $500 phone as a better deal despite its higher price.
Bundle pricing
As the name suggests, bundle pricing involves offering discounts for purchasing multiple items together. It’s a common strategy for selling multiple products at once and works well with price anchoring. This tactic is also a great way to eliminate slower-moving items in your inventory, which will help you reduce dead stock.
Comparative pricing
This particular pricing practice involves comparing your competitor’s pricing and setting your prices accordingly. This strategy may take a different shape depending on the business’s needs. For example, a new company may purposefully price its product lower than competitors to gain market share.
How does inFlow fit in?
Price anchoring may initially seem complicated, but it’s actually relatively simple. Unfortunately, implementing it and maintaining it can be difficult.
The good news is that software like inFlow can help. Our inventory management software lets you set up different pricing tiers for the same product, such as Standard, Premium, and Discounted. We have great sales and invoicing features, and our reporting and analytics make it easy to check the performance of specific pricing initiatives. Our software even allows you to create and manage product bundles, just in case you want to add bundle pricing along with anchor pricing.
So, if you want to implement anchor pricing successfully in your business, inFlow is here to help.
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