How to increase the attractiveness of your product or service
Find out how price anchoring can alter the perception of your product or service’s value for money
Sometimes a customer just doesn't know what your product is worth to them. We are used to thinking of this as a problem. If someone doesn't know the value of what you do, it feels as though they won't be willing to pay for it.
That's not necessarily so. We call this ‘unknown expected utility', and it gives you a superb opportunity to shape the customer's perception of what your product is worth. Pricing can be used as a cue to value. It's all about ‘first impressions' or, to use its technical name, anchoring.
What is anchoring?
Anchoring is one of the most powerful psychological effects relating to prices.
If you show someone a high price first, their expectations about the value of a product will be shifted upwards. When they then see the lower price which they will actually be charged, this will increase the attractiveness of your product or service.
People will compare the price of your product to the range of prices for comparable options. So if your price is £2,000 and the comparative range is £1,000-£10,000, you will look like good value. If the comparative range is £300-£2,000, you will look expensive.
It's a method that has been seen in dozens of economic lab experiments and countless commercial settings.
An anchoring experiment
In an experiment with MIT undergraduates, Dan Ariely and colleagues auctioned off some tricky-to-value items – wireless keyboards, boxes of luxury chocolates and obscure French wines. The trick was this: before the auction, they asked each person to write down the last two digits of their social security number and ask themselves ‘Would I pay this number of dollars for the item?' So someone with the social security number 440-84-8398 was looking at an initial price tag of $98, and their fellow student with the number 232-20-3911 started instead with $11.
These price tags were not part of the auction – it was a straightforward process where the highest bidder bought the product – but they had a huge effect on the bids that the students placed. Those with high digits ended up bidding about 50% more than those with low digits.
I have repeated a version of this experiment at many conferences and talks – and even when people are aware that I'm talking about pricing psychology, and many of them can guess exactly what I'm trying to prove, it still works. This effect is so strong that even when we consciously try to adjust for it, we usually can't.
So how can you apply price anchoring to business?
There are a lot of different ways to apply anchoring in most businesses. Here's a process you can follow to work out how best to use it.
1. Collect data
You want to know as much as possible about the range of prices that you and your competitors charge for a given product. Even if there are no direct competitors, find the range of things you'd like to be compared to. Then compile a list of as many examples as possible, writing down the product name, who sells it, the size or quantity, and how much they charge.
2. Order these by price level
You'll then be able to see the range of prices charged for similar products.
3. Now consider the path a customer takes before choosing to buy your product
Do they see a range of items in your shop? Or on your website? Or do they find different options by searching the Web? Is your product sitting in a shop alongside other similar products?
4. Find where in that path you can add a new product at a high price
If you are a retailer or if you sell products from your own website, you have a lot of control over this. You can place a high-priced option in front of the customer before they see your ‘standard' product. If you have a product in someone else's shop, you have less direct control. But you can still try to persuade the retailer to display a higher-priced, luxury version of your product alongside the standard one (show them this article if you like – it is in their interest too!) or even try to place your product in retailers where the default prices are already higher (Waitrose instead of Sainsbury's).
5. Choose your anchor price to be substantially higher than your standard price
The anchor effect still works for a £5 product with a £6 anchor, but it isn't very strong. If two prices are close together, customers are likely to compare them directly instead of changing their subconscious evaluation of the true value of the product. But if you can put a £20 anchor alongside that £5 standard product, then the true value is much more likely to be shifted.
6. If possible, try to measure consumer behaviour with and without the anchor
There are at least three variables that can change: the number of consumers who buy anything at all; the proportion who buy this type of product; and the relative share of the £5 product versus other versions (for instance, if you have a £5 and a £3 version, which sells more?). Measurement is really important as there are lots of effects which may be going on at the same time, and you want to know which ones are stronger. Once you've got your head around the process, the next step is to put it into practice.
You'll need to note down your product's competitors and their pricing details before designing your product anchoring spectrum. Set the price of your core product to be close to whichever products from the above list you are competitively positioned against.
There's a toolkit with template documents you can use here: www.psyprice.com
The Psychology of Price: How to use price to increase demand, profit and customer satisfaction, published by Crimson Publishing is available on Amazon now.