Price Anchoring is a pricing strategy based on the work of Daniel Kahneman and Amos Tversky
If you want to sell a watch for £2,000 and the best way to get people to recognise its value is to place it next to a £10,000 watch. This will price anchor it.
The reason why this works is a common cognitive bias called anchoring. Anchoring works because we tend to fixate on the first price we see and reference value on that when evaluating the value of similar products or services. In some senses Anchoring distorts our sense of value. Clearly the above works best if the potential purchased sees the £10,000 watch before they see the lower priced one.
Price Anchoring Used Car Sales
Once an anchor is established, all other judgments are made by adjusting against the anchor.
So, if I were trying to sell you a used car the initial price I quote is the anchor point. So if I then drop my price against the anchor point it seems like the new price is a relative bargain. This works even if the initial price is higher than it should be.
Price Anchoring House Prices
In research evaluating the effects of price anchors, researchers asked people to estimate the price of a sample home. They provided leaflets with information about other houses in the locality. Some of these some had genuine prices while showed an inflated prices.
Both the public and estate agents were swayed by the inflated prices. Who said that estate agents could impartially and professionally value house prices .. they were swayed by the false figures due to the anchoring effect of the inflated prices.
Price Anchoring Online & Offline Retail Sales
In the retail world, both online and offline anchoring can be used to nudge buyers. They will tend to see prices as reasonable when set against very expensive items of a similar nature. They will then regard the lower priced items as being reasonably priced.
Combating Price Anchoring
To protect yourself against price anchoring research a variety of products/services of similar nature and determine your own price anchor BEFORE entering sale negotiations.
Better still, when first talking to the sales staff set your anchor by saying you budget is £xxx. That helps set the anchor in your head and that of the sales staff. They will still try to get you to part with more cash but you are in a stronger position to determine what is a sensible price and what is an anchor figure.