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The Price Anchoring Effect

 

DisciplinesMarketing > Pricing > The Price Anchoring Effect

Description | Example | Discussion | See also

 

Description

The first price to be mentioned will have an effect on the perception of all future prices. If we start with $200, then $100 will seem cheap, but £1000 seem expensive. But if we start with $10, then $100 will seem expensive.

The anchor for a price perception may be found in the first price mentioned. It can also arrive in the mind of the purchaser, where the anchor may have been set by previous experience.

Example

A car sales person shows a customer an expensive car, anchoring the perception of price at the high end. Then they show them mid-range cars which seem so much cheaper than the expensive car that customers often decide to buy these.

A magazine offers a print subscription for $190 and print and online editions for a $200 subscription. They sell lots of the dual subscription. Later, when online studies show many customers making good use of the online edition, they offer this as a single item at $150, which many take up. This saves them much cost in print and shipping and increases their profit significantly.

A camera manufacturer offers the basic camera at a bargain $200. Lenses are extra and cost a lot more.

A kitchen retailer sells a basic mixer for $200, a mid-range one for $500 and a high-end one for $600. Some people buy the basic mixer because it is much lower than the other two, particularly the $500 anchor. Many others, however, who usually buy the mid-range, see the high-end mixer as 'only' $100 more, which is a much smaller gap than the $300 down to the $200 one, and so buy the high end machine, seeing it as a relative bargain compared to the $500 anchor. The normal price of the mid-range mixer is $400, but has a low profit margin. This strategy sells lots more basic mixers, attracting buys from people who were not thinking of buying, as well as upselling to the high-end mixer.

Discussion

Anchoring is related to the primacy effect, where the first item on a list is more likely to be remembered. It also uses the availability heuristic, where the first thing to come to mind is taken as significant. When we buy something we decide value by contrasting the price against another 'anchor' price. This anchor is already known, which is why it is often given first. This combination of anchoring and contrast is often used in many decision-making situations.

Low anchors are often for a basic product and set the mindset as 'bargain' before the necessary extras are added, bumping up the price. Another way this is done is to advertise the price before adding tax. Discounts use the anchoring effect, where typically the 'recommended retail price' is shown with a line through it and the 'sale' price shown afterwards.

See also

Contrast Pricing, Primacy Effect, Availability Heuristic

 

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