How do you know how much you should pay for something? How do you know what’s a deal and what’s a ripoff? You need some sort of reference point...a cue to help you evaluate.
The anchoring effect is a cognitive bias that influences you to rely too heavily on the first piece of information you receive. Stores use it all the time to convince you to buy. So if you’re shown a pair of jeans for $100 and then a similar pair for $150, then the pair for $150 seem expensive. But if you’re shown a $300 pair and then a $150 pair, the same $150 jeans seem like a steal by comparison.
Remember when J. C. Penney introduced “everyday low pricing?” They wanted to eliminate coupons and instead create a best price all the time atmosphere. Too bad they weren’t aware of the power of the anchoring effect. When sales slid bigtime, they got the message. Customers need that anchor number to inform them that they are getting a bargain.
All buyers, no matter what they are purchasing, want to know these two things:
1) What does it cost?
2) What do I get?
Potential customers believe if they know what they’re getting in exchange for the money they’re giving up, they can choose whether or not the product is worth it. Here’s the problem: human beings aren’t rational buyers. Whether or not something is worth it depends on several factors. Most importantly, it’s decided by our expectations. Expectations are set by anchoring.
Dan Ariely did an experiment on pricing for The Economist. When he surveyed 100 MIT students about those pricing options, Ariely got these results:
Cost for a year
Percentage who chose it
Print and Web
Why did the Economist even bother with that $125 print only option? Ariely conducted a second survey that shows why. In the second survey, Ariely removed the $125 print only option and asked a separate set of 100 MIT students what they would choose.
Here’s what happened:
Cost for a year
Percentage that chose it
Print and Web
The mere presence of the print only option even though no one chose it prompted a much higher percentage of people to choose the more expensive $125 print and web option. The difference would have amounted to 43 percent more hypothetical revenues for the Economist. Print and web for $125 seems like a much better value when it’s anchored by a $125 print only option and a $59 web only option.
So if you are engaged with a client, should we artificially inflate our prices and let the anchoring effect work its sales trickery? Um, no. There is an offsetting sales principle called price integrity which is crucial for building trust and continuous business relationships. We shouldn’t present a higher price without demonstrating more value and we shouldn’t show a lower price without a reduction in benefit. In both directions, clients should expect and see integrity in the price.
I Know the Market: Trust Me
In an experiment conducted some years ago, real estate agents were given an opportunity to appraise the value of a house that was actually on the market. They studied the house and the comprehensive booklet of information that included an asking price. Half the agents saw an asking price that was significantly higher than the listed price of the house; the other half saw an asking price that was lower than listing. Each agent was asked about a reasonable buying price and the lowest point at which they would agree to sell if they owned it.
What factors affected your judgement?
Remarkedly, the asking price was not one. They took pride in their ability to ignore it. Wrong, the anchoring effect was 41%. That’s a $82,000 difference between a $200,000 house and a $400,000 house assuming it’s the same house just listed differently. A group of business school students with no real estate experience was 48%. The only difference was the students admitted to being influenced and the professionals did not.
Does that mean we should disregard the anchoring effect altogether? If we are providing value, we should be aware of the anchoring effect to help us deliver the highest level of benefit for which our clients are willing to pay. This might mean presenting solutions in a good, better, and best approach for a particular need. Our best option is our anchor and provides the most benefit to our client. Consequently, it has the highest price. If our client is unable or unwilling to purchase this solution, then we have established a point of reference for both benefit and price, allowing us to adjust down our solution until we fit the highest level of benefit with the highest acceptable price.
Peoples’ objections to price rarely have anything to do what is or is not fair. They come from a place of inexperience and emotion. The client simply doesn’t have the background you have and relaying the message can be difficult. As someone who is trying to do the best thing for the client you are torn between the elements of price integrity and getting the business. You have to avoid paralysis by analysis that a prospect can slip into and present your solutions in a manner that gets them to act. If done properly it is a win for both sides.