All firm must focus on sales, and price is a key factor of those sales. Choosing the appropriate pricing point is a crucial choice that can affect a company’s bottom line. Consumers consider a variety of aspects when evaluating costs, and as a business owner, it’s critical to comprehend the psychological elements that affect customers’ choices. The anchoring effect is one such psychological element. This article explains the anchoring effect, how it affects sales, and how companies may use it to determine the appropriate pricing point.
The Anchoring Effect: What Is It?
When people base their decisions excessively on the first piece of information they learn, it is known as the anchoring effect, a cognitive bias. This first piece of information in sales is frequently the first price presented. This starting price acts as a launching point for all subsequent price talks. Consumers frequently evaluate all subsequent costs by comparing them to the first anchor point.
How Sales are Affected by the Anchoring Effect
Let’s look at an example to better grasp how the anchoring effect functions in sales. Imagine you are a business owner trying to market a $50 product. Based on your study of the product’s quality, features, and advantages, you think $50 is a reasonable price. Yet when you show the goods to a prospective consumer, they balk and complain that $50 is too much.
Then you start to haggle by proposing a discount and a new price of $40. As comparison to the $50 starting price, the client would think that the current price is reasonable. Due to the fact that the new price is lower than the original anchor point, they could also feel more at ease with it. The consumer may be more inclined to buy as a consequence.
In this case, a $50 anchor point was chosen, and the buyer utilized that price as a benchmark to assess the $40 reduction that was later offered. This illustrates how the anchoring effect works.
Using the Anchoring Effect to Increase Sales
Let’s look at how firms might use the anchoring effect to determine the appropriate price point now that we have a better understanding of how it affects sales.
1. Establish the Proper Anchor Point
Setting a suitable anchor point is the first step in taking use of the anchoring effect. The pricing should serve as the anchor point and represent the value, features, and quality of the offering. Also, it must be a cost that the intended audience is prepared to pay.
Market research is one technique to choose a suitable anchor point. Surveys, focus groups, and competition analysis are all possible research methods. You may establish an anchor point that appeals to your target market by being aware of their preferences.
2. Use Decoy Pricing
A pricing tactic called decoy pricing includes including a third choice on a price list. The third choice is typically more expensive and less appealing than the first two. This third choice serves as a ruse to make the other two appear more desirable.
Consider a company that sells a $50 product with two price tiers: a basic version for $25 and a premium version for $50. Because they think the premium edition is excessively pricey, potential customers could be reluctant to make the purchase. Yet, the premium version would suddenly appear like a better value if the company introduces a third choice, a super-premium version for $75. This is so that the $50 premium version seems more affordable in compared to the $75 alternative, which serves as a ruse.
3. Special Offers
Businesses frequently utilize discounts as a sales tactic to draw clients. Yet, it’s crucial to take the anchoring effect into account while providing a discount. Businesses might describe the discount as a departure from the initial anchor point rather than just providing a discount.
For instance, a company may characterize a reduction as a departure from the initial price of $120 rather than a 20% discount on a $100 product. The customer could view the discount as more meaningful and be more inclined to make a purchase if you do this.
4. Bundles of goods
Businesses can also utilize bundling as a price tactic to benefit from the anchoring effect. Offering various goods or services at a reduced cost compared to buying them separately is known as bundling.
Businesses can establish a suitable anchor point when combining items by setting the bundle’s price lower than the total cost of buying the separate products. The client may use this price as an anchor point to judge if the bundle is a better value than buying the individual goods.
Businesses may use the anchoring effect, a potent psychological component, to select the ideal pricing point. Businesses may sway clients’ purchasing decisions and boost sales by choosing the right anchor point, utilizing decoy pricing, providing discounts, and bundling items. To prevent deceiving clients, it’s crucial to remember that organizations should employ these tactics in an ethical and open manner. Businesses may enhance their pricing strategies and stimulate revenue development by comprehending and taking advantage of the anchoring effect.