How to Use Anchor Pricing

Anchoring describes the human tendency to use the first piece of information presented when making decisions. The first thing offered is called the anchor. We use this anchor to make decisions about anything subsequently offered.

Anchoring can be used multiple ways the most common being with product pricing and price negotiation. The most overly used example of anchoring is when Apple introduced the iPad.

“What should we price it at?” asked Jobs. “If you listen to the pundits, we’re going to price it at under $1000, which is code for $999.”” He put a giant “$999” up on the screen and left it there for ages before finally going on. “I am thrilled to announce to you that the iPad pricing starts not at $999,” said Jobs, “but at just $499.” On-screen, the $999 price was crushed by a falling “$499.”

The iPad was anchored at $999. When we finally hear the price is actually half what we expect, we go wild.

Using Anchoring to Price

To use anchoring, a number needs to be anchored in the potential customer’s head. The first number they come across will anchor the price. If the anchored price is high, they are willing to pay a higher price. If the anchor is low, then they will want to pay a lower price.

With anchoring, people use the anchored price to determine the overall value of the product being offered. Stores which have perpetual sales use anchoring on every item in the store. When you look at the price tag, it has the original price and the sale price. The original price, at the top of the price tag, tricks your brain into thinking you are getting a deal at the sale price.

Anchoring Examples

• When Williams-Sonoma introduced bread machines, sales were slow. When they added a “deluxe” version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain. source

• Every infomercial you have ever seen does two price anchoring. Products like this normally cost $399 in the store, but through this special television offer we are offering it at $79.99.

• Manufacturer’s Suggested Retail Price (MSRP) is often used as an anchor. The actual price you pay can be a few dollars less than the MSRP and you think you are getting a deal. This strategy is commonly used when selling new cars.

Avoiding Anchoring

Everyone is susceptible to anchoring, even people who are aware of it. Studies have been conducted on groups made aware of anchoring and they are still susceptible to it. Another study attempted to financially motivate people to not be affected by anchoring and they were still affected by it.

Something to do with our monkey brains I’m sure.