Is Price Anchoring Right for Your Business?

• What is price anchoring?
• The psychology behind price anchoring
• Pros and cons of price anchoring
• When to use price anchoring
• Real-world examples of price anchoring
• 8 steps to implementing price anchoring in your business

Price anchoring is a sales tactic in which sellers set a visible price point to influence a customer's perception of value. The goal is to guide the customer's purchasing decisions so that when they see a discount, they believe it's a deal.

For example, when you walk into a clothing store during a sale, you might see the item's original price right next to the new, less-expensive price. The higher price acts as the figurative anchor to the lower price. The comparison makes you think you're getting what you want for a bargain.

There are different types of price anchoring techniques, such as high anchors, low anchors, tiered pricing, competitor comparison, and more. We'll explore those pricing strategies in detail later. First, let's see how price anchoring works on a psychological level.

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Everyone loves getting a good deal. Scoring on a sale makes you feel savvy; you may even feel like you've outsmarted the system. If you're a bargain hunter, it might seem like your patience is being rewarded. This is one form of the psychology of cognitive bias . It's how our brain processes information we want to believe is true even though it might not be entirely factual.

The initial, higher price the customer sees — the anchor — sets the tone of the sale. Maybe that price is out of the customer's budget. But the discounted price can be attractive because it's such a good deal.

How "expensive" a customer perceives a product to be is relative. When a customer has many options, price anchoring taps into the part of their brain that determines the value of something not just in absolute terms but also in comparison to others.

Price anchoring is a win-win for you and your customers. Your customers get the product or service they need within their budget, and you close a deal.

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Price anchoring can be a game-changing strategy that leads to more revenue growth by:

• Increasing your sales: As discussed before, the psychology of price anchoring encourages customers to purchase products they might not have otherwise considered by making the product appear more affordable. Price anchoring's success is deeply rooted in behavioral economics — the study of what people should do versus what they actually do.
• Informing your data and insights: Price anchoring can provide key insights into customer buying behavior. You can learn valuable information about customer preferences by testing different price points and observing how customers react to the anchor prices.
• Helping your business stay agile: Price anchoring is a flexible strategy that can easily be adapted to changing market conditions and customer behavior.
• Upselling: By creating a perception of value based on comparison, price anchoring can help customers understand the benefits of a higher-priced product or service. In other words, you get more function and capability if you spend more.
• Building trust with your customers: Customers are presented with clear and comparable options. When you are honest about your discount — you're not gouging with the original price point — customers feel they can trust your brand.

While price anchoring can be an effective strategy, it's important to use it ethically and responsibly to avoid misleading customers or creating a negative perception of your brand. If launched incorrectly, you can risk:

• Losing customer trust: If you inflate the anchor price, customers may feel deceived or manipulated. This can damage your relationship with your customers and the brand's reputation.
• Diminishing future sales: If price anchoring is used too frequently, customers may become accustomed to inflated anchor prices.
• Devaluing your product: When a product is consistently priced below its perceived value due to price anchoring, customers may question its quality or worth.

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Price anchoring is effective when used properly. You'll want to reserve it for the following circumstances:

• Clearing inventory: Your anchor price can convey a sense of urgency for customers. Think about a going-out-of-business sale or seasonal discounts to clear away items for the next batch of newer products. You still want to make a profit. Calculate your production costs before driving prices too low.
• Product launches: If you are entering a new market or have a new product, you want to attract your target audience's attention and build a relationship with them. You can anchor your price to your competitors' pricing to gain a foothold in the market. Once established with a loyal customer base, you can test your pricing strategy to see if raising prices will significantly impact your customers' behaviors.
• Promote a premium product or service: By anchoring the price of a premium product or service to a higher-priced option, it can appear more affordable and attractive to customers. The higher price creates a perception of higher value for the product category. This makes the lower-priced option seem like a good deal, even if it's still relatively expensive.

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Price anchoring strategies come in various forms, each designed to influence customer perception and decision-making. Some pricing strategy examples include:

Often used with luxury goods, high price anchoring involves a premium item displayed next to a more moderate one. The moderate product is still an investment, but compared to the premium version, it seems to be the best option.

Example: A car dealership displays a luxury sports car with a price tag of $100,000 next to a mid-range sedan priced at $30,000. The high price of the sports car makes the sedan seem more affordable in comparison, encouraging customers to view the sedan as a better value.

Sometimes in that same scenario, you want to entice your customers to choose the premium price option. Low price anchors help the customer compare capabilities and conclude you can get more if you pay more.

Example: A streaming subscription service offers a basic plan for $10 per month. They also promote a limited-time offer for a premium plan at $25 per month, which includes additional features. The low price of the basic plan makes the premium plan seem like a good value, even though it's significantly more expensive.

The tiered price anchor strategy focuses on offering different levels of capabilities for the same product or service.

Example: You display a basic software package next to a pro package and a premium package. The basic package offers the standard features for the user at a lower price while the pro and premium packages, although costlier, include more capabilities.

With reference price anchoring, a brand directly compares its price to a competitor's higher price.

Example: Brand A is selling a smartphone for $899. They advertise that their smartphone is $200 less expensive than Brand B when you sign a contract wit them. Not only will customers consider buying the smartphone from Brand A, but that customer might also switch their loyalty.

Bundle pricing is everywhere these days, from insurance to fast-food meal deals. This strategy focuses on combining multiple products or services into a single package, usually selling it for a slightly lower price for the combo.

Example: A cable TV provider offers a deal that includes internet, phone, and TV services such as a DVR or a streaming platform for a discount compared to purchasing each thing individually.

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If you embrace pricing tactics along with certain sales tips for success, you'll be on the right track to creating a truly customer-focused strategy. Here are some actions to get your sales team started with price anchoring.

What want or need are you satisfying and for whom? Define your target market and discover what their buying behaviors are through market trends and surveys. Your customer relationship management (CRM) platform is a great resource for historical customer data. The software can segment customers based on various criteria, such as demographics, purchase history, or behavior. You can use this information later on for targeted marketing campaigns and personalized customer experiences.

Look at your competitors' pricing, but don't confuse price anchoring with starting a pricing war; a race to the bottom will not drive profits. Demonstrate the value of the product by pricing it fairly. Your audience research in step one will help fill in a few blanks, but you'll need to go further by calculating the production cost of goods sold and your distributor prices.

Define the objectives of your price anchoring strategy. Do you want to increase sales or create brand loyalty? Maybe you need to clear out some inventory. Your goals will help you decide on the right pricing strategy.

Clear and effective communication is key for your sellers to represent your product and its value. Make sure your sales team understands the time frame of the sale, the benefits of each tiered option (if applicable), and the reasoning behind the discount. You want your sellers to be genuine in their conversations with customers.

Team up with your marketing department to develop a communication strategy that clearly outlines when the price anchors will launch, where they will be advertised, and what the sales copy will be. You want your sales team and marketing materials in lockstep for a unified customer experience.

Have your anchor price displayed prominently. After all, it's the point of reference for the customer to base their decision on the value of the product.

Experiment with different anchor prices to see what works best. Use A/B testing to compare the effectiveness of different approaches.

Continuously monitor the impact of your price anchoring strategy and make adjustments as needed. Track sales, customer behavior, and market trends to optimize your approach.

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Price anchoring is a powerful psychological pricing strategy that can be used to increase sales, enhance customer perception of value, and drive business growth. Remember, while price anchoring can be effective, it's essential to use it in conjunction with other pricing strategies and avoid misleading customers. Do it honestly and transparently, and it could help you gain a competitive advantage in the marketplace.

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