Price Anchoring
Price anchoring is a psychological pricing technique that influences how customers perceive products. It is setting an initial price (anchor) that affects how customers view the next prices. Businesses strategically display a higher-priced item first. This presentation makes the other options seem more reasonable by comparison. The method creates a reference point that helps customers assess the cost of products or services.
Price anchoring doesn’t have a rigid formula; it’s set based on the initial or highest-priced item that serves as the anchor, and lower-priced options or alternative prices are shown to position them as better deals relative to the anchor.
Why Price Anchoring is Important
Price anchoring is a psychological pricing strategy and this strategy is used to influence customers’ purchase decisions. Businesses guide consumers toward products that appear to be better deals. High anchor prices nudge customers toward more expensive options if they can present higher value. On the other hand, it might establish a point of comparison that makes lower-priced items seem like better deals. In ecommerce, price-sensitive customers compare options. Anchoring allows retailers to highlight the value of specific items. Positioning products within a clear value hierarchy reduces choice paralysis.
Factors Influencing Price Anchoring
Initial Reference Point
Price anchoring’s success depends on the initial price presented to customers. Reference prices shape their opinions about the other options, making higher prices seem reasonable.
Consumer Psychology
People tend to rely on the first information they see a price. A product that is discounted to $120 from $200 affects the customer’s decisions. The $200 price acts as a mental anchor.
Presentation and Framing
The way the anchor prices are shown can amplify their effect. Bold text, contrasting colors, or comparison charts enhance prices’ visibility and impact.
Applications in Business
Price Anchoring in Ecommerce
Online retailers use price anchoring on product pages. They show the original price next to a discounted selling price to make the discount more appealing. Amazon frequently employs this strategy. They display list prices besides adjusted prices, positioning the reduced price as a better deal.
Price Anchoring in Retail
Brick-and-mortar stores use anchoring techniques. Retailers place expensive items at the front of the store or at eye level in grocery stores. As customers browse, they perceive other affordable products as well. This strategy encourages customers to pick expensive items.
Price Anchoring in the Service Industry
The service industry uses price anchoring by first presenting a premium plan. They follow this with lower-priced options, which makes the budget-friendly plans appear more cost-effective. Airways show their highest-tier options as anchors when, let’s say, you look for an economy seat. Middle plans feel like a balanced choice in terms of price and features when you compare them.
Source: https://www.britishairways.com/travel/home/public/en_us/
Practical Example
Apple utilizes price anchoring when introducing new iPhones. The newest and the most expensive model acts as an anchor. As customers explore other options, other phones appear more affordable. For example, the iPhone 15 Pro Max acts as the anchor. This makes the iPhone 15 and iPhone 14 models seem like more accessible choices. So the company generates more revenue from different customer groups.
Disadvantages of Price Anchoring
Customer Distrust: If customers learn that the anchor price has been artificially increased, brand trust is harmed.
Limited Impact: The anchor requires well-defined alternatives to be successful. The initial high prices discourage price-sensitive customers who may not engage further in purchasing products.
Wrap Up
Price anchoring changes customer perception. This approach works best in competitive markets like ecommerce and retail. Even though anchoring can increase conversions, merchants need to apply it carefully. Too much manipulation of initial prices can create distrust among customers. The right implementation resonates well with shoppers.
