Have you ever walked into a store and seen an item that was priced so ridiculously high you wondered who would even purchase it? Even if no one buys the overpriced item it still serves to make the other price points in the store seem reasonable (even if they themselves are way too expensive).
We aren’t always logical when it comes to prices. Consumers tend to overvalue the first piece of information they come into contact with. Scientists called this the “anchoring effect” or the “contrast principle”.
Pay close attention. You can literally see the anchoring effect everywhere and you can use it to dramatically increase your sales.
Context Is King: First Impressions Matter
The setting in which we first encounter events largely determines how we evaluate people and things. The initial context of how an object is presented is evaluated as an important piece of information. Context often defines how we anchor prices, products and people.
In an experiment by behavioral economist Richard Thaler, two scenarios were tested. One involved a person going to buy a beer from a nearby grocery store, the run-down kind. The second scenario involved going into a fancy resort hotel. In both situations the beer was to be consumed outside of the hotel, so where the subjects got it from was irrelevant.
Thaler’s research showed that people were willing to pay more for a beer purchased in a fancy hotel than in a grocery store, even though it’s the same beer. This holds true for companies that brand themselves as luxury versions of discount and off-price counterparts. The “elevated” brand positioning gives them the perceived right to charge more for merchandise and consumers accept it.
Anchoring Sets the Standard
The first part of negotiations is setting mental boundaries. If the first boundary set is high, then subsequent offers and counteroffers will reflect this established boundary.
If you have ever been to a bazaar or market and attempted to buy an item you’ve quickly become aware of this rule of thumb. Sellers initiate the sale with an exorbitantly high price, as you walk away they lower the price substantially.
Despite being lowered the 2nd or 3rd offer is still much higher than the item could be purchased elsewhere. In the end you end up buying the item and thinking you got a good deal.
Experts Are Susceptible to Anchoring Too
In a research project conducted by Northcraft and Neale, researchers looked at how anchoring affected real estate agents and students. In the experiment, both groups were shown a house and then given different listing prices.
After making their offer, each group was then asked to discuss what factors influenced their decisions. In follow-up interviews, the real estate agents denied being influenced by the initial price, but the results showed that both groups were equally influenced by that anchor.
Even real estate agents weren’t immune to the anchoring-contrast principle. Research also shows that despite being knowledgeable even experts succumb to the effects of anchoring. You aren’t too smart to avoid it. Sorry.
One High Price Increases Overall Sales
Have you ever seen a listing of prices and notice that there is one that is way too expensive? A good example is dining out. When you look at the wine menu there is always one section with prices several times higher than the rest. I don’t know a thing about wine, but when I look at 50 dollar bottles of wine, the 15 dollar glass of Merlot somehow becomes much more appealing.
Tricky Suit Tailors
There is an old story about two brothers who sold suits. They worked at an upscale shop and whenever clients came in the younger brother would pretend to be half-deaf asking clients to speak louder. Upon trying on a handsome new suit the client would inquire about the price.
Unsure of the price the younger brother would call out to the older brother for a price check. The older brother strategically positioned in a backroom would yell back, “150 dollars”. Pretending to be hard of hearing the younger brother would then repeat $50 dollars, a price much lower than the initial 150, but also higher than the average. Quickly seizing on what they thought was a great deal customers would quickly pay up and leave.
What do you think caused the customer to immediately accept the first offer as a great deal?
The Power of Multiple Price Points
In an experiment designed to test the effects of multiple prices, people were offered two beers—a premium beer at $2.50 and a bargain beer for $1.80. What did they select? Not surprisingly 80% chose the more expensive one.
In the next experiment, an even cheaper option was introduced. It was priced at 1.60. The results showed that 80 percent of people choose the middle option beer at 1.80. The rest bought the 2.50 offering.
In the last variation, the lowest price beer was switched out for a much more expensive premium beer at 3.40. The results were surprising: Most people opted for the 2.50 option, only a few went for the 1.80 option, and 10 % nabbed the most expensive option.
What does this mean? Simple. Offering multiple price points can increase sales.
Simplicity and Sales
We don’t like zeros and dollar signs. In research conducted via the Journal of Consumer Psychology, scientists found prices that contained more syllables seemed much higher to consumers. The following pricing structures were shown to subjects:
The top two prices seemed much larger to consumers than the third price, despite being exactly the same. We don’t even like dollar sign ($) symbols. A 2009 Cornell University Study found customers in upscale restaurants spent significantly less when menus contained the word dollars or the $ symbol.
Researchers suggested that in a world overloaded with information, the minimalist approach to listing price serves to help customers focus on value over price.
Here are a couple of lessons you can learn from the contrast-anchor effect:
You are susceptible to it.
Being smart won’t help you avoid it.
If you want to sell something, introduce several different price versions.
Set up one of the items as much more expensive.
Context is king. First impressions really do anchor how you evaluate information.
If you want to get something, go higher first than settle for the price you want.
I hope this article was useful. If you enjoyed it, drop a comment below and tell me where you have seen the anchoring effect in your own life or business.
This article has been edited and condensed.
Sia Mohajer is a PhD student turned high school teacher who writes about the psychology of success at Brain Hacks. He strives to provide his readers with science based psychological tools for success. He is on a mission to reprogram his mind. Connect with @brainhacksblog on Twitter.