What Is Price Anchoring & How Does It Work?

Have you ever watched how a manufacturer manipulates a buyer using the price of a product? Or maybe you have already practiced this yourself?

Today, there are a lot of strategies in business to get a buyer to purchase a product. One of the most effective strategies is price anchoring. This strategy is based on human psychology. There are no products that are too expensive or too cheap. People evaluate goods relative to the original price they see.

There may be two identical bracelets on the market, but one will cost $1,000 and the other $100. And people will evaluate them differently. The first one will seem to be of higher quality, elegantly branded, and the second one will seem to be of more second-rate quality, and perhaps even less beautiful. All that’s necessary is to switch the prices, and everything will change in people's minds.

Price anchoring is a strategy in which the brand sets the price that the buyer will refer to when buying a particular product. This price will be the anchor.

For example, sometimes e-commerce stores set three product prices on their website. The first and lowest will cover only production and delivery. The second one will be slightly more expensive to cover the production, shipment, and overhead costs of the team. And the third, and highest, price will include production, delivery, overhead costs, and also a small additional amount that will be reinvested in the company.

As we mentioned earlier, there is no cheap or expensive product. For the buyer, all prices are relative. Relative to the first price they saw.

We’ve all seen discounts on goods in stores. The first price — the more expensive one — is crossed out, and the lower price is shown next to it. Subconsciously, it seems like a bargain.

Some brands may use a similar strategy, but before offering a discount, they first inflate the price of the product. Then, they offer a discount on this inflated price, thus increasing their profit even more.

We can also give an example with Apple. When the company introduced the iPad, Steve Jobs first said that a fair price for the device would be $999. And then, unexpectedly for all the viewers, he said that the company had decided to sell the IPad for $499. At that moment, even viewers who had doubts decided that they would definitely buy the iPad.

Such a phenomenon as price anchoring is easier to understand by examples.

The most common example of price anchoring is a crossed-out higher price. The tag shows two prices: one is cheaper and usually shown in a larger font, and the second is a high price, which is crossed out.

We see such examples everywhere, but it continues to work in the minds of buyers.

Another example of price anchoring is varying prices from low to high. As a rule, three prices are offered: low, medium, and high. And the product itself, according to the description of the marketers, corresponds to the prices. The cheapest one has less functionality; perhaps it is not as high-quality. The median price corresponds to a product that has good functionality and better quality. And the most expensive product is usually not much different from the product with an average price, but it is presented as a complete package of all the features of this product.

People tend to choose the median option, ostensibly to save money and get a quality product. You can use this technique based on the price at which you really want to sell the product: this will be your median price.

Another way some businesses leverage price anchoring is through competitive comparisons. They use competitors' prices as anchors, presenting their options as naturally significant bargains.

The price anchor, like any other strategy, is not applicable everywhere. There are times when this strategy won't work.

For example, it doesn’t work when a consumer studies a product very carefully on different marketplaces, compares prices, and conducts their own analysis. Such customers are resistant to anchor prices, because they know how much the product actually costs.

Here’s another scenario: Imagine that you have already put up your product at a certain price. Then, you try to raise the price without losing demand. In this case, the strategy will most likely not work: since the customers are familiar with the initial cost, it will be more difficult to get them to buy the product at a higher cost. In this case, if you raise the price, you should improve the quality of your products, or add some new features.

The anchoring bias is a cognitive bias which is well known in pricing, negotiations, and other contexts. It describes the tendency to rely heavily on the first piece of information offered in an interaction. This initial information, or anchor, establishes a frame of reference and decision makers base their decisions around that anchor.

Even sales experts may be susceptible to anchor pricing, although they may deny it.

Thomas Mussweiler conducted a study with German mechanics who were asked to estimate the value of a used car. Their answers were significantly lower when given a low anchor, and higher when given a high anchor. At the same time, they denied that their assessment was based on a price anchor.

The reason for this lies in the fact that every item has both positive and negative qualities: high anchor prices direct our attention towards the item’s positive attributes, while low anchor prices direct our attention towards the item’s flaws.

It is best to apply an anchor price by creating a multi-level pricing strategy. This way you create several versions of products and offer them at different prices. This automatically builds in your anchor prices and allows you to take advantage of the multi-price mindset.

Another useful strategy is to use a comparison of your product with a competitor's product in advertising. In this case, your product should be qualitatively superior to the competitor's product, and cost less. Then the competitor's price will be an anchor for the client, and you will be able to show the advantages of your offer. But if your product is not particularly different from a competitor's product, you risk losing your customers.

Also, it is exceptionally important not to fall into competitor pricing, so be sure to show your value relative to competitors in ways other than just pricing (features, support, etc.).

Pricing strategies can seem overwhelming, not just for beginners, but for business professionals as well. Finding the right strategy is not an easy task, so do not be discouraged by not-so-successful beginnings. Price anchoring might look easy, but as you can see, there is a lot of research going on “behind the scenes.” This is exactly what distinguishes successful from unsuccessful businesses.

As always, we encourage you to learn as much as you can about pricing strategies before making a decision. We hope that after reading this article, anchor prices are more understandable now. Also, in order to make the process of creating a price anchor easier, you can use Priceva’s Competitor Price Monitoring service. Competitor Price Monitoring has such functions as a tracker and a repriser. The tracker will track prices, and the repriсer will change prices according to your pricing policy.

Businesses use anchor pricing to manipulate consumer behavior and make the customer buy a product at a favorable price (for the business).

Businesses use various strategies, which have been described above, to designate an anchor for the buyer. In most cases, such strategies work — even on sales experts.

A brand anchor is that special little thing, a marketing ploy that sets you apart from other manufacturers and catches the attention of customers. Like a price anchor, this may be subconscious for customers, but they will remember some element of your brand by which they will later identify you.

Yes, price anchoring is legal. But remember that you should not advertise a product below the set market price. For example, when you have multi-level pricing, the lowest price still should not be lower than a certain amount.