Your business sells high-end luggage and is advertising a brand-name suitcase for $600 that normally lists for $800. Meanwhile, your friend’s business sells accounting software in three differently priced packages and is betting that most buyers will choose the medium package—it has many of the high-end package’s features, but the price is closer to the low-end offering.
You and your friend both are using a pricing strategy called price anchoring. Here’s a further look at price anchoring and how you can use it in your business.
What is price anchoring?
Price anchoring is the practice of establishing a reference price to influence consumers’ perception of a product’s value and guide their purchasing decisions.
It relies on a well-established phenomenon in consumer psychology known as anchoring bias, which is our natural tendency to hold onto the first piece of information we encounter as a reference point. We use this first impression to then compare other options or pieces of information—prices or product choices in the case of purchasing decisions. Sellers anticipate our anchoring bias by displaying prices meant to catch our eye and to make us more inclined to buy.
Price anchoring is behind many purchasing decisions. Discount displays on store shelves, online advertising, and TV commercials use price anchoring to get our attention. Products ranging from cars to clothing to computers include the regular retail price, sticker price, or manufacturer’s suggested retail price (MSRP), all of which are anchor prices. From there, we decide how much we’re willing to pay.
How price anchoring works
Anchor pricing relies on several elements of buyer psychology:
- Price perception. Buyers evaluate prices in relative terms—a product is cheap or expensive only in relation to other, similar products. An anchor price provides a basis for comparison shopping and making a buying decision.
- Power of suggestion. Buying decisions typically involve some level of anxiety. We ask ourselves: Is that really a good price? Are there other comparable products for less? Sellers use price anchoring to try to make the buying decision quicker by displaying an attractive discounted price or placing an attractive price choice among several. This triggers what’s called a heuristic process, or mental shortcut, that leads to a purchase.
- Aversion to extremes. Most of us, when confronted with an array of choices, are more likely to pick something in the middle. It’s another feature of buyer psychology that sellers exploit by offering different price variations of a product or service.
Examples of price anchoring
Customers confront price anchoring almost every time they go shopping, either in traditional brick-and-mortar stores or online.
For example, in a supermarket you might see a brand of laundry detergent with a regular price crossed out, and next to it a sticker with a price that’s $2 off the regular price for this week only. You’d use the regular price as your anchor, then weigh the size of the discount. The anchoring effect may be strong enough that you take the mental shortcut, forgoing any further price comparisons, and act on the discount even if a less expensive detergent is available.
Sellers also frequently use 99¢ in price displays, as a way of making shoppers think a price is lower, by directing attention to the first number in the price display. For example, a price of $199.99 might make a shopper focus on $100 instead of realizing the price is just 1¢ less than $200.
Common types of price anchoring
Some of the most commonly used price-anchoring tactics include:
- Strike-through pricing. This is the simplest and most prevalent type of price anchoring, where the seller displays the markdown price next to the regular (anchor) price, which is crossed out or concealed. The seller may accentuate the price comparison by circling it or highlighting it.
- High price anchor. The seller displays an expensive model of a product, and then a moderately priced model with many similar features next to the more costly version. The seller uses the high-priced model as the anchor, encouraging many shoppers to select the moderate model as the better combination of price and product features.
- Low price anchor. Reversing the high-price idea, the seller promotes a low-price version as the anchor, betting that many buyers might question the quality and be more interested in a higher-priced version with greater perceived quality.
- Tiered pricing. This is a common type of anchoring, especially in online sales, where several choices are available. Hotel and car-rental companies, and third-party booking services such as Expedia, provide an array of choices and prices, often highlighting some choices as “Best Seller” or “Most Popular” to encourage buyers.
- Competitor pricing. Sellers might make a side-by-side comparison of their product price and features versus competitor’s prices and features.
- Comparative package pricing. This uses tiered pricing to present different variations or combinations of a product or service. The seller highlights a medium package as best value, while bracketing it with a lower-price/lower-quality package and an expensive/marginally better package.
When doesn’t price anchoring work?
At the same time, price anchoring may not work well in the following situations, including:
- Superficial discounts. The difference between your anchor and markdown prices should be big enough to elicit buyer interest. For example, a 2% markdown on a wide-screen TV that normally lists for $500 for a savings of $10 probably won’t draw many buyers compared with a discount of, say, 15%, or $75.
- Educated consumers. If buyers are already familiar with the product and can make their own price-value calculations, they may ignore your price anchor. Information about product prices and features, and comparisons, are available to consumers through a variety of publications and websites.
- Price wars. Using competitor prices as an anchor poses a risk of being upended if competitors respond in kind, turning your price into their anchor. This could be a particular risk if you’re just breaking into a market, or if you have bigger competitors that can better withstand a price war.
- Inflated anchor price. To maintain customer trust, a seller should be honest about the anchor price, and not set it artificially high. If there’s an MSRP or regular price, use it. Don’t try to set a $1,000 sticker price for a product that normally lists for $500 and advertise that lower price as a discount. There’s a real risk buyers will see through the deception, earning the seller a bad reputation.
- It’s already free. Some online products such as newsletters, digital publications, and types of software can be downloaded or viewed for free, so there’s no price anchor. Establishing one can be difficult or even impossible once consumers are conditioned to receiving something at no cost, because, in essence, the anchor price has historically been zero.
4 tips for using price anchoring
- Display prices prominently
- Make clear comparisons
- Differentiate yourself from competitors
- Offer price ranges
The following tips can help guide you in how to use price anchoring.
1. Display prices prominently
Buyers want price information upfront, not buried in a store display or online advertisement. Don’t make them hunt for this information.
2. Make clear comparisons
If you’re selling several versions of a product at different prices, for example, have side-by-side concise comparisons of price and product features. Many retail websites make it possible to select the specific product and compare it against another selected product.
3. Differentiate yourself from competitors
Focus on price if your product retails for less than your competitor’s. Or if the competition sells a similar product in the same price range, highlight those features of your product that make it superior or a better value.
4. Offer price ranges
Service providers may be more successful in providing a price range as a type of anchor because the time and effort of providing a specific service can vary. For example, a service-based business might give a price range of $200 to $400. That way, the customer has a floor and ceiling on the price.
Price anchoring FAQ
How do consumers perceive anchor prices?
An anchor price serves as a base of reference for consumers, relative to the price they eventually pay. The anchor establishes an initial value for the product or service in the consumer’s mind, from which they can consider alternatives—a lower price for the product, a different product, or a competitor’s product.
Is price anchoring an effective pricing strategy?
Price anchoring can be an effective way to boost sales for businesses, particularly online retailers. Strike-through anchor pricing, and low and high anchors, may steer customers more quickly to a buying decision. Tiered pricing involves a comparison of prices and options, and customers might need more time to make a decision.
Does the placement of the anchor price have a role in its effectiveness?
There’s an old saying in marketing and retailing: Presentation is everything. How and where you place your anchor price can influence its impact on buyers. As a rule of thumb, put prices front and center, to make the buying decision easier.