15 July 2024, 02:38
By Leigh Caldwell Aug 23, 2013

Pricing - how to lead without misleading

In this article, Leigh Caldwell, the author of The Psychology of Price, a guide to using price to increase demand, profit and customer satisfaction, discusses the phenomenon of anchoring, and shows how retailers can get their customers to happily pay more for the same product …

One of the most fundamental principles of setting a price is that there is no true value for anything. Any product is worth whatever a customer will pay for it, and what customers are willing to pay is surprisingly easy to influence with some simple psychological techniques.

Even though we all know that value is subjective, we often forget this when we look at our own products, because we know them so well. Chances are, you are an expert on your own products, how good they are, the advantages and drawbacks of each different feature or option that a customer can choose, and the alternatives that your competitors sell. The temptation is to think that your customers will also know a lot about what they are buying, and therefore that you need to keep your prices low so that they don’t switch to a competitor.

Your customers are not experts. To calculate the ‘correct’ price, they would effectively have to guess how much happiness – or as economists call it, utility – they would get out of the products they buy from you. With a durable purchase such as furniture, this means predicting how they – and their family and friends – will use it during the course of several years of their life. Of course this is impossible, so instead the customer simplifies the decision by boiling it down to a few simple comparisons.

This is where the idea of anchoring comes in. You can make a striking difference in the value a customer puts on your product by simply giving them a comparison point which makes your product look good.

“Present a higher-priced anchor product before they see the core product that you really intend to sell. If the customer looks at a £950 table first, they will look much more favourably on the £575 table that they see next”

The idea comes from a set of experiments carried out by economic psychologists over the last 30 years. A typical example took place at MIT in Cambridge, Massachusetts.

In an experiment with MIT undergraduates, Dan Ariely and colleagues auctioned off some hard-to-value items – wireless keyboards, boxes of luxury chocolates and obscure French wines. Because these were not regular purchases that the students would make in daily life, none of them had a clear idea of what the typical retail price might be.

Then, before the auction, they asked each person to write down the last two digits of their social security number and ask themselves “would you 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 themselves part of the auction. After the students wrote down the price tags, the auction 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.

In furniture retail the anchoring effect is easy to use, because you have a lot of control over how customers see your products and what order they are experienced in. Present a higher-priced anchor product before they see the core product that you really intend to sell. If the customer looks at a £950 table first, they will look much more favourably on the £575 table that they see next.

This is also why sale prices are so effective – if your price tag shows that a sofa was previously on sale at £1800, but is now only £1399, the customer is subconsciously influenced to think that it really must be worth more than £1399. Even though customers are completely aware of sales and discounts, and have seen price tags like this thousands of times, they are unable to stop themselves from paying attention to them and changing their opinion of what the product is ‘really’ worth.

"You can create a premium or luxury version of some products, so that there’s always a more expensive anchor option for customers to consider"

If you are not the retailer yourself, you have a little less control over how the products are presented to the customer – but you can still work with the retailer to maximise the impact of anchoring on their customers. If you offer a product catalogue you can show the more expensive products first so that customers are ‘softened up’ when they see your mainstream products afterwards.

You can create a premium or luxury version of some products, so that there’s always a more expensive anchor option for customers to consider – and, as an extra bonus, some people may buy the luxury version anyway!

You should make sure the price of the anchor product is substantially higher – at least 30% if possible – than of the core product. But don’t go too far – if the anchor price is 400% higher, most customers will not consider the two products to be comparable, and the effect may not work.

Anchoring works better on some customers than others – those who like to think the purchase through more carefully, and take a ‘rational’ approach of carefully listing features and comparing products from different competitors, will be less susceptible to it. In the next article I’ll discuss some other techniques that will work on those customers too.

Leigh Caldwell is the author of The Psychology of Price, a guide to using price to increase demand, profit and customer satisfaction, published by Crimson and available from Amazon and all good booksellers. Leigh is the founder of Inon, a leading pricing consultancy.

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