When making decisions, we rely, or anchor, too heavily on one piece of information
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Often, the first piece of information offered automatically becomes the anchor from which subsequent judgments are made. Nothing is cheap or expensive by itself, but it could be, compared to something else. Consider how you can establish a favorable comparison that anchors your price or attribute better than your competitors. Consider what anchors you are providing – intentionally or unintentionally.
One of the most used examples of price anchoring is probably the “suggested retail price”. When showing the regular price and the sale price together, the sale price is anchored to the regular price and thus seem like a cheap bargain – even when the sale price wouldn’t have seem like a big deal without the comparison. A cheap price doesn’t become a big deal unless we compare it with a more expensive price – or item. What’s even more: we are inherently bad at remembering what price we typically pay, even for our favorite items.
An initial value, the “anchor”, serves as a mental benchmark or starting point for estimating an unknown quantity. When first being presented with an anchor value, it is as if the anchor exerts a magnetic attraction, pulling estimates closer to itself. Anchoring works – even when the initial anchor doesn’t represent a reasonable number.
By adding a high priced item to your list of products makes everything else near it look like a relative bargain. When we estimate a numerical value we tend to be susceptible to the power of suggestion. Any related value that we hear just before we make our estimate has a big statistical proven impact on what number we’re going to estimate. Even when warned beforehand about the persuasive powers of anchoring we cannot help but relate information presented alongside when we estimate what’s a fair price or value1.
This is also the reason why it’s a good idea to get your number in first in a negotiation rather than letting your opponent name a number first.
William Hunt1 described two types of anchoring: contrast anchoring and assimilation anchoring. The two types of anchoring have opposite effects.
Contrast anchoring occurs when you compare two stimuli. When you stare into the head-lights of a car, its surroundings look dark.
Here, subjective perceptions are displayed away from the anchor.
Assimilation anchoring occurs when you have to invent an answer – given one or more possible responses. This is the kind of anchoring played mostly on by marketeers as they list the before price of a discounted product.
Here, responses are drawn toward the anchor.
Harry Helson1 listed the following as qualifying for an anchor: “recency, frequency, intensity, area, duration, and higher-order attributes such as meaningfulness, familiarity, and ego-involvement.”
1 Priceless: The Myth of Fair Value (and How to Take Advantage of it) by William Poundstone, Hill and Wang 2010
2 Price Anchoring, Or Why a $499 iPad Seems Inexpensive by Matthew Amster-Burton