Nailing your pricing should be the focus of every small business owner. While big companies have entire departments dedicated to price optimization, we usually have to rely on our judgment and trial and error. Does this mean we are condemned to always price too high or too low? Absolutely not! There are many proven pricing strategies developed over decades of research that we can put to work immediately. Many are based on human psychology and have stood the test of time. One such strategy is price anchoring, which is based on the psychological principle of “anchoring”.
So what is anchoring?
Anchoring is just one example of cognitive bias, an important area of psychological study first identified in the early 1970s. Cognitive bias represents a “pattern of deviation in judgment that occurs in particular situations.” Basically cognitive bias occurs when people use subjective information that may be irrelevant, inaccurate or inappropriate to reach a conclusion about something. With “anchoring”, people tend to put too much emphasis on the first piece of information given and this skews their thinking about everything else they observe afterwards. Anchoring is such a powerful force that even after being told about anchoring people still can’t break its effect on the mind.
What‘s really behind MSRP
The Manufacturer Suggested Retail Price (MSRP) is something that we have all seen when buying at a store. Here’s a challenge: find a single example anywhere in the country of a store selling a product above MSRP. After all if the price is merely a suggestion stores don’t have to abide by it. The true purpose behind presenting an MSRP is to establish a high price anchor in the minds of consumers so they feel the actual store price is a good deal.
While psychologists spend their time studying the effects of anchoring, entrepreneurs have put this phenomenon to good use by applying it to their pricing strategies. Because of anchoring, the first price that buyers see will serve as the main reference point for all other prices set by a business. You have to make it count.
Making price anchoring work for you
Let’s say I’m selling a consulting package priced at $500 for three hours of work. I know that some buyers may not feel comfortable spending that much with me so I offer an introductory package of a mini-consulting session for only $99. If I start out offering the low-priced mini-session then that will serve as the “anchor” in the minds of buyers. Subsequently showing the $500 regular session price will make it appear obscenely overpriced since “I’m a $99 guy”.
How do I deal with this? I start out presenting a “deluxe” consulting package for $5,000. That serves as my new anchor in the mind of buyers. Afterwards I present the regular $500 session and the $99 mini-session. With a new anchor set, the regularly-priced session – what I really aim to sell – will appear as an absolute bargain; the $99 mini-session will feel like a gift. Renowned Psychologist and Behavioral Economist Dan Ariely discusses this at length in his book Predictably Irrational. It’s worth a read.
