The Anchoring Effect: How Retailers Can Take Advantage of a Powerful Pricing Strategy
One of the most important aspects of retailing is creating and implementing a pricing strategy. It can be tricky to decide how to price your products—finding the right price is a combination of art and science. Depending on the type of retail business you’re involved in, you may want to set you prices low and sell a large volume, or you may want to set your prices high and sell a small volume. There are a variety of factors involved when setting a price; however, there is one factor that you are probably unaware of that influences consumers’ buying decisions: the anchoring effect.
The anchoring effect is a strategy where consumers begin with a first approximation of the value of the item and make adjustments to that number based on other relevant information. The first approximation serves as an anchor (hence the name of the strategy), and consumers must adjust, but they often rely too heavily on the anchor and make insufficient adjustments. Consumers tend to concentrate their search of relevant information relatively close to the initial anchor (or first approximation), even if the anchor is not a realistic number.
Confused? Here’s how this strategy can be applied to a retailing scenario. Note that I have split this blog into two different types of retailing scenarios: retailers that offer price cuts and retailers that don’t.
Retailers that offer price cuts:
Let’s say that we decided to set the initial price of our item at $250. Now, let’s pretend you decide to have a sale and apply a 10% discount, offering the item for $225.
As the retailer, we have insufficiently adjusted the price by applying the discount; however, customers are still anchored to the higher price of $250. According to the anchoring effect, consumers will be more willing to buy the product, because they believe and feel as if they are getting a better deal than they actually are.
In this scenario, consumers will use $250 as their initial estimate of the value of the product. Considering advertisers and retailers generally “stretch” the truth to sell their product (or at least this is the perception of the consumer), consumers will assume the item has a lower value than the list price of $250. This skepticism acts as the relevant information (mentioned above), because consumers assume the product is overpriced based on previous encounters with other advertisers and retailers. This information is then used to adjust their estimate of the value of the item; however people tend to adjust insufficiently. The consumer’s estimation will be only slightly lower than the initial price of $250, so when the discount of 10% is applied, consumers will think they are getting a great deal, because the price will be lower than their adjusted estimation. This, in turn, makes the discounted price seem more reasonable, even if the price is higher than the actual value of the item.
Retailers who don’t offer price cuts:
Now, what if you are a retailer that doesn’t offer price cuts? You are probably thinking the anchoring effect doesn’t affect you, but it does! If your customers are buying multiple items, by presenting the more expensive items first, they become anchored to the higher priced items. Therefore, when the customer goes to check out, they will estimate their total to be much higher than what the actual total will be. This also works in reverse, so if you present the less expensive items first, their overall estimate will be much lower than the actual cost of all the items. To avoid customers putting items back, present your most expensive items first and follow them up with your less expensive items.
Has the anchoring effect ever been used on you?
You’re probably thinking not, since you’re a savvy retailer yourself. But think about this: Any time the initial price of an item is listed along with the reduced price, the anchoring effect is being utilized. Have you ever been to a store where the price tag has a “compared to” price as well as the price the establishment is selling the item for? Did seeing that comparative price make you feel as if you were getting a really good deal? Then you have been influenced by the anchoring effect! Now that you’re aware of the implications, do you think you are immune to its effects? Researchers have found that regardless of whether you’re familiar with its effects, you still will be influenced.
Now that you have learned the basis of the Anchoring Effect, how can you implement it into your business strategy?