How much would you pay for dinner? How much would you say the office building across the street is worth? As illogical as it sounds, if you’re asked those questions just after listening to the lottery results, the figures you heard will influence your answers. The fact that they have nothing to do with the questions themselves makes no difference. In other words, our brain unconsciously “anchors” the figures and this affects our subsequent decisions.
This example is rather intriguing, but it’s not particularly relevant in the real world. For companies, however, the anchoring effect has great potential. If understood correctly and used strategically, it can improve brand positioning and increase sales.
The anchoring effect, or anchoring heuristic, was discovered by cognitive psychologists. It is one of several types of cognitive bias that comes into play when people have to make decisions.
The first researchers to comprehensively study and describe the phenomenon were Daniel Kahneman and Amos Tversky in the 1960s.
The anchoring effect is based on the principle that when making decisions, people are unconsciously influenced by information in their environment, even if it is completely irrelevant. This information may be deliberately provided to the decision-maker, or it may simply be present by chance.
Anchoring can be either unconscious or conscious.
In the first case, the effect at work is called priming. In other words, people absorb information from their environment and then unconsciously use this as a point of reference when making decisions.
Kahneman and Tversky conducted an experiment to demonstrate this. They got participants to spin a wheel of fortune and then asked them to estimate what percentage of UN countries were in Africa. The results were rather impressive: the higher the number somebody span, the higher their estimate for the number of countries.
However, anchoring can also be conscious, in which case the mechanism at work is the adjustment heuristic. One example can be seen in situations where people have very little information to go on. They “anchor” in the information available, even if it has no logical connection with the decision they are being asked to make.
Let’s take a look at an example. If you ask somebody what they would pay for a caffeine-based drink containing immunity boosting ingredients, they will base their answer on the price of an ordinary coffee, because they have no other way of estimating the price of the unknown product.
We can do little to bypass the anchoring heuristic. Even learning about it does little to stop us falling prey to it in the future. The anchoring effect works subliminally on experts and non-experts alike. Cognitive researchers Furnham and Boo found that the mechanism is effective even when test subjects are told about it beforehand.
The anchoring effect arises as the result of a heuristic, that is, a guiding mechanism that our brains use when we are required to make a decision.
From the point of view of evolution, resorting to heuristics makes perfect sense, because in lots of situations we simply don’t have enough time to access, assimilate, and weigh up all of the information we need to make the best decision. In the Stone Age, when people saw a wild animal approaching, they had to make a snap decision: danger or no danger? It was a matter of life or death. And the same underlying principle still applies today. We all use rules of thumb and mental shortcuts to handle everyday situations.
They save us time and effort because they are subconscious processes and our brain handles them quite effortlessly. We only engage in conscious, controlled thought when something unexpected quickly grabs our attention. Think about it. As an experienced driver, you can drive to work each day as though you’re on auto-pilot, but if you encounter roadworks on your usual route, you notice immediately. Our brains fall back on heuristics when we are tired, distracted, or under stress.
So, the anchoring effect is a form of cognitive bias that arises from heuristics. Kahneman and Tversky assumed that it occurs because people do not sufficiently adjust their judgment in relation to the anchor. Later research contradicted this theory, and conflicting models exist to this day, meaning that the question of why exactly we fall prey to the anchoring heuristic is still a mystery.
One thing is certain though. There are other types of cognitive bias that influence us too, for example the IKEA effect, the halo effect, the decoy effect, the endowment effect and the bandwagon effect. And like the anchoring effect, all of these can be used in sales and marketing.
In 2002, Daniel Kahneman was awarded the Nobel Prize in Economic Sciences for his research into decision-making.
The marketing departments of many companies successfully use priming to influence the behavior of potential customers.
It’s even relevant for companies trying to decide on their business name. Critcher and Gilovich carried out a study that demonstrated that diners at a restaurant called “Studio 97” were prepared to pay an average of 8 dollars more than diners at a restaurant called “Studio 19”!
But if you already have an established company name, you don’t need to worry. There are plenty of other ways for you to take advantage of the anchoring effect. Let’s take a look at the most effective, tried-and-tested strategies.
Why are prices ending in 99 so popular? The explanation lies in the fact that customers latch onto the number before the decimal point as an anchor.
Kenneth Manning and David Sprott demonstrated this in a study using pens. The participants were asked to choose between two standard, almost identical ballpoint pens. One was priced at $1.99, the other at $3. What do you think happened? 82% of the participants chose the cheaper pen. The researchers then repeated the experiment, but changed the prices to $2 and $2.99. The cheaper pen was still chosen more frequently, but only by 56% of the participants. The explanation? The price difference between the second pair of pens was perceived to be less significant. In day-to-day business, those few cents could add up to a hefty increase in turnover.
And combined with product packaging and successive price increases, the 99-effect can be extended even further.
Make strategic decisions about your product range to boost sales in your online shop. A lot of customers would initially consider an organic cotton T-shirt priced at $40 to be too expensive. But place that same T-shirt alongside a premium T-shirt that costs $99, and customers will see the $40 model in a whole new light.
Companies that focus on a few select products or services often use the anchoring effect when deciding on their prices, typically offering three versions of their product: a cheap option, a mid-range option, and an expensive option. The most expensive option acts as an anchor to raise the customer’s price threshold for the mid-range product. This approach has proven itself time and time again in various studies. If a “premium” option is offered, sales for the mid-range product or service increase, despite there being no change to the quality or scope.
To make discounts appear as attractive as possible, always indicate the price difference as a percentage. When customers see a sale price, they can’t quickly calculate how much they are actually saving. The only thing their brain registers is: “What a bargain! Don’t miss out!” This also works to entice customers who would otherwise have considered the original anchor price too high.
As a rule of thumb, you can apply the “rule of 100” in this context: For products that cost less than $100, the discount should be expressed as a percentage. For example, a reduction from $5 to $4 corresponds to a 20% discount, which is much more attractive than a $1 discount. On the other hand, for product prices above $100, you should quantify the price saving in dollars. For an original price of $200, for example, a $50 discount sounds better than 25%.
You can use percentages in the other direction too. Price increases presented as a percentage appear lower than those given as a fixed value. This is especially useful in contracts, for example, to reduce the number of customer cancellations.
Subscription models are already widely used by providers of digital services and SaaS companies. It is in the company’s interest to retain customers for as long as possible, for example by having them pay an annual fee, rather than deciding whether or not to renew each month. You can use the anchoring effect to persuade your customers to opt for this type of subscription.
For example, offer a small discount for the annual subscription option, and display the equivalent monthly price next to the (slightly higher) monthly price the customer would pay to renew each month. Given these two options, many people will choose the annual subscription to save money.
A similar approach can be applied to physical products too, by selling items in bundles, so that the unit price for the products sold as a bundle is lower than that of an item bought separately. The higher unit price acts as an anchor and encourages the customer to opt for the bundle, resulting in a higher spend.
How can you raise your prices without upsetting existing customers? Let’s take Apple as an example. The company has been raising prices gradually for years, despite protestations from critics who say that the technology hasn’t actually changed that much. However, because each new price acts as an anchor for the following price increase, the customer perceives the difference as relatively small and accepts it. Instead of only releasing major (and expensive) innovations, it’s worth introducing smaller, successive changes, because customers will be more willing to pay for them.
Does $5 for a cup of coffee sound completely ridiculous to you? Perhaps. Yet thousands of people pay this amount at Starbucks without batting an eyelid. Starbucks has achieved this feat by selling more than just coffee. It has invented a whole lifestyle and way of drinking coffee. Nowhere else will you find a Spiced Pumpkin Latte or a Blonde Roast Macchiato – and it even comes in a personally labeled cup! The Starbucks coffeehouses have other USPs (unique selling propositions) too, notably the setting, with comfortable sofas and armchairs that set them apart from other cafés. What can you do to stand out from the crowd? How can you present your product so that the prices of your competitors no longer act as anchors in your customers’ minds?
Your website is the perfect place to incorporate aspects that influence customer decisions.
For example, set anchors by pre-selecting certain options in forms. If you want to sell your annual subscription model, set this up as the default choice. If you have a basic and premium version of the same product or service, set up your site so that the premium version is selected by default.
Another way of taking advantage of the anchoring effect is to include customer testimonials on your site. Visitors will be subconsciously influenced by positive comments and more likely to make a purchase as a result. The little banners you see on hotel websites, saying “Three guests have just booked!” work in exactly the same way.
If you want to delve deeper into the psychology and power of the anchoring effect, grab a copy of “Thinking, Fast and Slow” by Daniel Kahneman.
The anchoring heuristic is a powerful psychological mechanism that companies can use in their marketing and sales campaigns. It works subconsciously and is effective even when people are aware of its existence. By combining it with other types of cognitive bias, such as loss aversion or selection bias, the impact of the anchoring effect can be exploited further still.
But remember, the anchoring effect alone is no miracle solution. If a product is deficient in some way, no clever anchors will persuade customers to buy it. Used consistently and skillfully, however, cognitive biases can form the basis for effective online marketing strategies that boost sales and revenue.
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