By definition, price anchoring is a marketing strategy where you set a visible starting price for your product but focus on highlighting the current discounted price.
Sounds complex? Our glossary simplifies everything you need to know about price anchoring and how it works in business. Let’s read on.
Understanding Price Anchoring & How it Works
Price anchoring is a clever strategy often used by organizations to influence customer behavior. A high-priced option is first used as an anchor to create curiosity and a perception of value and awareness in the customers’ minds.
When the lower-priced option is presented, it seems like a better value in comparison, increasing the likelihood of customers choosing the lower-priced option.
Price anchoring is better explained with an example. Suppose a business sells two different products, A and B, where A costs $100 and B costs $80.
If presented side by side, the customer may see Product B as a good value but not feel motivated to purchase it. Introducing a third option, Product C, which costs $120, may enhance the value of Product B and make it more appealing to customers.
The key takeaway here is that the cheapest option- even if moderately-priced or expensive, has a better chance of selling when compared to more expensive options. Businesses can use this anchoring bias to design effective pricing strategies that leverage the customers’ tendency to make decisions based on relative value.
The trick of placing a lower-priced option alongside the original price makes the lower-priced option appear more attractive and ultimately leads to increased sales.
How Does Price Anchoring Work?
There are two ways price anchoring works for businesses dealing with more than one product:
- High price anchor is when a premium product is priced higher than the product you want customers to buy. This strategy helps influence their decision and drives sales toward the high-priced product.
- Low price anchor is when a product is priced slightly higher than a basic product to make customers feel they are gaining a lot more by paying a slightly higher price.
How Does Price Anchoring Support Your Pricing Strategy?
Price anchoring keeps your pricing strategy afloat in two ways:
1. By giving your customers the power to decide.
Price anchoring simplifies decision-making by driving customers to a specific product or service through the bandwagon effect (people’s tendency to adopt a practice simply because everyone is following it). It develops a frame of reference and increases the customers’ willingness to pay.
2. By avoiding extremes.
When it comes to pricing, most people prefer to stick to the middle option. The top and bottom tiers act as reference points that influence customers to choose the middle one. In price anchoring, people tend to avoid the risk of both extremes by choosing the middle option. However, it’s important to keep in mind that different audiences have different needs, so the information provided should be tailored accordingly.
Is Price Anchoring an Ethical Business Practice?
Of course, it is perfectly legal to use price anchoring as long as you:
- Utilize only the actual prices instead of manipulating customers by using higher ones.
- Maintain transparency and accuracy in conveying information about the pricing to customers.
- Avoid any illegal practices to manipulate your customers’ decisions.
How to Implement Price Anchoring?
Here are some of the easiest ways to implement price anchoring:
- Create a tiered pricing strategy and offer the core product in different versions and prices. This feature automatically factors in your anchor prices and leverages the multi-price mindset.
- Set a pricing tier as an anchor, usually the middle or high-end plan, which serves as a reference point for customers evaluating other options.
- Create a perception of greater value by placing high-priced plans as the anchor. This strategy gives more value or lower-priced products.
- Guide customers towards choosing a pricing tier or plan that offers the best balance of features and price.
How to Implement Price Anchoring the Right Way
- Never overuse the strategy. It can mislead customers and make it difficult for them to determine the actual value of each product.
- Track your product portfolio. Discounted prices can hurt your sales, even for products that are not discounted. This is because discounted prices can become an anchor, causing customers to expect lower prices in the future.
- Take care to avoid price anchoring conflicting with other behavioral tactics like price thresholds.
Price anchoring is a powerful strategy that can work wonders only if wielded with care, skill, and thought. Done well, it can generate good revenue and keep your customers happy.
