What is Anchoring in Pricing?⚓Episode 12
In this episode of Pricing College – we discuss the concept of anchoring in pricing – and how you can use it to your business advantage.
TIME-STAMPED SHOW NOTES: ANCHORING IN PRICING
[00:45] Anchoring sits in the area of behavioural economics.
[01:25] How do sales teams anchor you to a previously higher price?
[01:55] Anchoring can help people understand the value of a product.
[02:00] Aidan mentions books such as Influence or Priceless – as having some good examples.
[02:55] Cost-plus pricing may anchor customers and sales teams to cost – rather than the actual value of the product or service.
[03:40] Aidan gives a tip on selling a used car using anchoring.
[04:05] Auction results will depend on the economy – where people anchor themselves based on their mood.
[04:45] How you frame the question can often be as important as the question itself.
[05:20] Joanna explains how outcomes can depend on how the questions are asked.
In today’s episode, we want to talk about one of those more dark art style aspects of pricing. That isn’t purely a cost-plus pricing strategy, but the topic of anchoring.
Anchoring, it’s a concept that sits within the area of behavioural economics which fundamentally, has to do largely with psychology and behavioural psychology.
The founding father of behavioural economics is a guy called Daniel Kahneman. He was the first person to question the economic theory of people buying logically or rationally. He suggested that people buy emotionally or irrationally and this is where that concept of anchoring drives.
I think our listeners and nearly everyone will be aware of being influenced to some extent, you know when they are shopping.
A classic example is you go into a clothes retailer to buy some new clothes and you see 30% sale discount signs. Now, somewhere in your mind, you think this must be a great deal because “I’m getting lower than a potentially even artificially high anchored price.” So, what’s happened here? You’ve been anchored to that higher price and with that, you think you’re getting a great price note.
Pricing is a good way to anchor people and to help them understand what value is. Because people find it very difficult to think about value. It’s an abstract term. So, they need it to be sort of framed for them. It needs to be anchored and positioned correctly for them to understand what’s good, and what’s not so good.
Yeah, and I think this topic has been covered in a couple of very good and easy reading books. It’s covered by the child Eeinie influence, I think was one where he covered it.
And also, the book Priceless by William Poundstone, both of which give a number of examples of this topic. One thing that struck me was when you ask people how tall a mountain is or a hill is. Often, they can’t give it. They’re often not aware unless they see it in reference to something else. And in many regards, pricing is similar. It’s the price compared to another price.
I suppose in terms of simple cost-plus pricing, we were thinking about that earlier. How do people set prices on cost? If you look at that in terms of anchoring, you can see by setting prices on costs, you’re lowering your potential to get a higher price. That’s because it’s gravitating and anchoring everyone to cost. And you’re not thinking about willingness to pay, how customers perceive value, and not testing that price ceiling.
I think that you can even argue with yourself in a negative way and you can even knock your own sales team. If you can’t go on about the cost, there is a tendency for people to push it down to that cost. They will see it as the cost, the number that will be anchored in their mind as well.
Another classic example in some of these things can be a little bit hard to believe unless you saw the statistical evidence. It’s the classic example of buying or selling a used car. All the evidence suggests that if you want to sell it at a high price, you should ask the seller. You should just quote, get in there first and quote a high price. Then, you will anchor the purchaser to a higher price for the later negotiation.
There’s another reason why people don’t like estate agents, for instance. They were quite reluctant in the past to use auctions because it has a tendency to pull things down. But in a boom, however, they found that an auction can increase the price point because people are anchoring themselves by a dream of the best house in a lovely suburb. So, in a downturn, it’s probably not good to do an auction. But in a boom time, it’s probably a good option to use the auction as a way to sell houses.
Yeah, very often, it’s the way the question is presented to people. It’s not just necessarily pricing but you can use this anchoring concept in many regards. You will see it in things such as referendums and countries.
The way questions are asked in political questions, the governments are often very concerned about framing the question in a certain manner. It’s because that is statistically proven to influence the outcome. Now, even though the question is largely the same, the answer you get can be very different.
In Deniz Berkeley, there’s an interesting study about how the concept of anchoring not just applies to prices and numbers, but also applies to ideas.
Now, in this study, they wanted to see if the presentation of an exam influenced people’s results. In particular, women’s results. And they found that having a different format, a more positive gender format increased marks for women by 10 to 20%. So literally, how they framed the study, the exam did make people perform better, or women perform better in exams.
I think we’re going to wrap it up quite shortly. I think what we covered today really indicates that pricing and the pricing profession is much more than just numbers on a spreadsheet. There’s a science but there’s also an art to it and where that line is drawn, who really knows. But there is certainly room for people who are very very talented in this profession, and hopefully, different people find this podcast interesting.
When you think about it, what does customer-focused pricing mean? You are moving into more psychology behavioural economics. You are looking at finance and maths. But you’re looking at things in their entirety.
The market isn’t easy to understand. People are easier to understand, but you have to try and find those different measures to gauge and improve your price setting.
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